Factors to consider before taking a bank loan

I will not be wrong if I say that not more than 1% of the total population in India is aware of the basic principles of time value of money. And that is why almost always they make mistakes while taking a bank loan. The loan may be for building a house, for financing higher education or whatever. Here, I describe a few rules that every body should keep in mind while taking a loan from a bank. I will first describe two golden rules of bank loan. Then I will describe the factors that one MUST consider while going ahead with a bank loan.

The two Golden Rules are:

a) Public Sector Banks are anyday better than private sector banks. Private sector banks may cheat customers at the drop of a hat. They may not have the intention of cheating a customer. However, most of the time, they do not address your concerns seriously. It is a myth that public sector banks are inefficient; that it takes lot of time to process a loan. I took a housing loan from a private sector bank and it took more than 5 months to process the loan. Any public sector bank will do it faster. There is no incentive for the public sector banks to cheat a client. Private sector banks pay heavily to the employees and keep a very ambitious target. So they are always in the lookout for new clients. Once you take the loan, you are irrelevant to them as far as customer satisfaction is considered. They behave very similar to the Indian politicians. Forget the voters after the election is over. For the private banks the motto is Forget the Customers after the loan is disbursed. Not that they do not take the EMI from you. They sometimes take more than what they promised to take. Of course once you complain, you get back the excess money charged. But whay take the trouble in the first place? If you do not believe me, go to a
private sector bank. Preferably those who spend a lot on advertisements.

b) A fixed rate loan is always better than a floating rate loan. A floating rate loan only helps the bank in their asset-liability management. It does not help the customers. And yes, if you take a fixed rate loan from a private sector bank (that is if you prefer to ignore what I have written in the previous paragraph), make sure that they also write it in their documents that it is a fixed rate loan. I had a bad experience. The bank wrote in my documents that it is a fixed rate loan. But it was a floating rate loan in their documents. I had to send a mail to one of the directors of the bank to sort the issue.

Now let's see briefly how the bank cheats you: You do not need to read this if you happen to take a loan from a public sector bank.

a) You apply for a loan of Rs. 10 lakhs (say). The bank says you are eligible for a loan of Rs.9.5 lakhs. They actually disburse Rs.9.1 lakhs. All your EMIs will be calculated on Rs.10 lakhs. The bank documents will show: EMI of so and so for a loan of Rs.9.1 lakhs. How many people understand this? Good way to make money in India! One of the reasons the stock prices of private sector banks are rising day by day!

b) The loan disbursal takes place on 17th January (say). You have given auto-debit facility to the bank. On 23rd January you find that EMI has been deducted twice from your account. Though they are supposed to calculate pre-EMI interest till 1st Feb, they often deduct the full EMI.

c) You have taken a fixed rate loan at (say) 7.75%. Interest rate drops to 7.25%. Nothing happens to the tenure of the loan. Interest rate increases to 7.75%. The tenure of your loan increases. Bank says it is a floating rate loan. Even if you assume it is a floating rate loan (just for the sake of argument), you can see here that the tenure of the loan should not change because the interest rate today is the same as it was when you took the loan.

d) After 31st March the Bank says that income tax statement cannot be given because you purchased a land. Then you realize all these days the house in which you are staying is a land (and not a building) as per the bank's document.

e) Everytime you complain, the bank makes a phone call. They say the problem has been sorted. They never send a written statement. Good way to protect themselves from the consumer rights court.

f) You give auto-debit facility to the bank. Every month you get a phone call from the bank. "Sir! some money is due. When are you paying?" You go to the ATM and take a statement and realize that the balance is enough to pay the EMI for the next one year.

The list goes on.

P.S. For the benefot of those who do not know how to compute EMI, the PMT function in Excel will give you the EMI directly. If you have a query write to me at pitabasm@yahoo.com)




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