Finance Essentials

Do you understand your loans well?

26 Sep 2016 15:09

Are you looking to take a loan from a bank? With the use of technology and ability to access information such as your transactional data, income data and credit scores, existing as well as new customers are able to get faster approvals compared with 2-3 years ago. “For existing customers, we offer pre-approved loans through Net banking. By and large, the turnaround time for loans has been reduced by 50-60% thanks to the use of technology. Overall, we see a lot of enquiry generation through mobile and internet,” said Sumit Bali, senior executive vice-president and head-personal loans, Kotak Mahindra Bank Ltd.

Even for a new customer, a faster loan process is possible with the use of marketplace financial technology (fintech) companies such as Bankbazaar, Deal4loans and Paisabazaar. “Fintech companies are more of an enabler. With the help of these intermediaries, enquiries are closed faster and costs are coming down, which is good for the lending space,” said Bali.

Neeru Kumari, 38, a homemaker now based in Patna, had taken a loan of around Rs.21 lakh in 2006 to buy an apartment in Bengaluru. “I shifted my loan from one bank to another after some time (a few years) because of the stark difference in their interest rates,” said Kumari. “It was easy to shift. In fact, I did everything while working in Mumbai and not Bengaluru,” she added.

Technology is helping reduce the overall documentation process. “Customers are now able to upload their income and KYC (know-your-customer) documents. This enables banks to give out loans faster,” said Anup Saha, senior general manager, product head-retail secured asset, ICICI Bank Ltd.

Many banks even offer instant loans. But faster loans doesn’t mean the risks and caveats that a borrower needs to be aware of, change. The basic rule remains the same: don’t take a loan you can’t service. So, before you are attracted by the speed of getting a loan rather than a real need for it, you need to understand the kind of loan that you are taking and the costs attached to it.

Mint Money looks at three major types of loans that many individuals take and the real cost of taking those loans.

Personal loans

Banks such as ICICI Bank Ltd, HDFC Bank Ltd, Axis Bank Ltd and Kotak Mahindra Bank Ltd, among others, offer ‘instant’ or pre-approved personal loans. If you are planning to take one of these loans, here are some things that you need to check. “The time line to get a personal loan for existing and new customers has come down drastically. Though your bank may give quick approval, one should definitely shop around to get competitive interest rates,” said Naveen Kukreja, chief executive officer and co-founder, Paisabazaar.com.

Personal loans are easy to get, but expensive to repay. Since a personal loan is an unsecured loan, the interest rate on it is higher—ranging from 11.59% to 32% per annum, depending on your income, profile, the company you work for and residential status. You can get a maximum loan amount of Rs.40 lakh, depending on your job profile. The tenure for these loans is generally 12-60 months. Besides the interest rate, you need to check the processing fee, prepayment charges and late payment charges on the loan. For instance, if you take a Rs.5 lakh personal loan at 14% interest rate for 5 years, you will end up paying back the lenderRs.6.98 lakh. Your monthly instalment will be Rs.11,634. Usually, the processing fee is 0.25-3% of the loan amount, which the banks charge upfront.

So for the same loan amount, if the processing fee is 2%, you will pay Rs.10,000 as processing fee. Some banks charge a flat fee. In case you want to foreclose your loan, the foreclosure charges can go up to 5% of the outstanding loan amount.

Auto loans

While you can get auto loans on floating as well as fixed rates, most banks offer a fixed rate loan for automobiles. Like personal loans, auto loans also come with costs such as prepayment, processing and foreclosure charges. If you are buying a new car, the interest rate is in the range of 9.65% to 14.50% per annum. However, for a used car the interest rate is higher: 10.90-20% per annum. The interest rate varies across banks. Say, you take an auto loan of Rs.6 lakh and the interest rate is set at 13% for a 5-year period, your total outgo will be Rs.8.19 lakh. The processing fee for auto loans is between 0.2% and 1% of the loan amount. In the same example, if the processing fee is set at 1%, your processing fee will be Rs.6,000. Banks also charge a flat fee, depending on the loan amount. The tenure for these loans ranges from 1 to 5 years. But some banks may run promotional offers or schemes, and may offer loans of 7 years, according to Deal4loans. The tenure also depends on the type of car you wish to purchase. If it is a premium car, the tenure may be restricted to 3 years.

Home loans

Banks have recently changed the way in which they calculate the interest rate and have moved to marginal cost of funds based lending rate (MCLR) from base rate. In case of MCLR-based loans, the rates may get reset every 6 or 12 months, depending on the reset clause at the bank. At present, the interest rate on floating home loans ranges from 9.35% to 14.50% per annum. Processing fee is usually 0.25-1% of the loan amount. This is generally non-refundable even if your loan application is rejected. Say, you take a home loan of Rs.50 lakh at an interest rate of 10% for 20 years, you will end up paying Rs.1.15 crore (principal plus interest). This amount, of course, precludes prepayment and change in interest rate. A 1% processing charge will mean you have to pay Rs.50,000 more on this loan.

“Along with the charges and interest rates, look at how smooth the process is going to be. Since a home loan is a longer-term loan, you don’t want to get stuck with a bank that doesn’t service you well. You could talk to people who have already taken a loan from the bank that you plan to approach,” said Suresh Sadagopan, a Mumbai-based financial planner.

What you need to do

Technology is helping banks evaluate customers. You as a customer should also make use of this technology. Even if your bank gives an instant loan, shop around for better rates. There are many online loan portals that give you details about the costs involved while taking a loan. You could cross-check the interest and charges on these websites. Avoid doing rough calculations; instead, use an online calculator or ask the bank for numbers to get the right picture.