The bad news is that the rates are likely to maintain an upward bias in the near future. To be sure, they are unlikely to come down any time soon. The year 2010 has seen the central bank revising key policy rates (repo and reverse repo) upwards six times, prompting banks to hike their base rate and prime lending rate (PLR) in tandem.

While the banking regulator chose to maintain status quo in its December mid-term review, many banking experts are betting on a resumption of rate hikes in January. "Loans could become costlier in times to come owing to tight liquidity conditions and higher inflation," says Sumeet Vaid, founder, Ffreedom Financial Planners. "And the first impact of high interest rates is on short-term loans like personal loans and car loans. The way to cope up with such a scenario is by having a sound financial plan, which restrains you from over-leveraging."

Therefore, there is an increased need to be cautious this year - both while borrowing and choosing the loans you wish to close first, in case the situation for taking such a decision arises. Here's how you can keep tabs on your loan portfolio in order to keep your debt burden within manageable limits:

Car Loans:

After home, car comes next in the hierarchy of prized possessions for Indians. It is, for them, as the cliché goes, a symbol of having arrived. The euphoria surrounding the purchase of your first car, however, should not blind you into going overboard, although it is a secured loan. Dream it may be, but make sure you stay grounded in reality while estimating your affordability. In other words, do not go for a huge car loan that stretches your repayment capacity. And how does one ascertain this capacity? "The EMIs should not make up more than 25% of take-home salary. Remember, car is a depreciable asset," explains certified financial planner Pankaj Mathpal. "For example, if you buy a car costing `7 lakh today, you will have to pay more than `9 lakh, including interest on the loan in five years and the value of the car will be around Rs. 2-3 lakh then. In case of a home loan, on the other hand, it is different as the property appreciates with time."

Personal Loans:

A key component of the unsecured loan category, this could attract an interest rate of anywhere between 13-50%, depending on the bank and the borrower's profile. Banks and their direct selling agents often peddle these wares enthusiastically because of its potential to earn huge interest. You, on your part, should make sure that you do not fall for the bait. These are usually meant for emergencies and are to be taken for the short-term only. "We have seen many people go for high-cost debt like personal loans and credit cards for funding their children's education and even to invest in shares. Little do they realise that if the markets were to tumble, the value of their investments would shrink, leaving them in a lurch," informs Madan Mohan, chief counsellor with the ICICI Bank-supported Disha Financial Counselling Centre. Therefore, it is best to look at such loans as the last resort, after exhausting all other options. Leave lifestyle, travel, consumer durables and marriage-related spending out of this.

Credit Cards:

The same would hold true for credit cards as well, rate hike or not, as these remain the costliest form of borrowing. Any credit card outstanding could carry an interest as high as 40-45% per annum, which makes it imperative for you to clear the same within the credit period allotted to you. You would do well to remember that it is a tool for facilitating cashless spending and should not be mistaken for a quickie loan source.

Source: http://economictimes.indiatimes.com/