Retail lending has come into its own over the past few years. Initially, it was private banks and finance companies who led the charge. With public sector banks (PSBs)—who have ready access to low-cost funds and a nation-wide reach—now getting into the act, competition is hotting up. Says Rupert Almeida, GM, projects and retail banking, Bank of Baroda: "Consumerism has increased manifold, many people today are thinking about loans." The numbers tell the story: individual borrowers with commercial banks have increased from 12.6 million in 1998-99 to 16.3 million in 2000-01.
For middle-class individuals there’s a loan at your doorstep, to buy houses, cars, consumer goods and gadgets, get a college degree, fund a wedding...what have you. There’s plenty of choice, which is good but creates complications of its own. With every lender looking for an edge and offering the ‘best’ deal, there’s a clutter of information out there. It can get confusing, which is why you need to be clear what you want and how to go about getting it.
The first thing to do: see whether you can afford a loan given the state of your finances. Says Balaji Iyengar, manager-retail assets, hsbc India: "Look at your monthly outflows on the loan and whether you have sufficient capacity to repay. Only if your post-loan financial position is comfortable should you consider borrowing." Lenders, on their part, also have some checks in place. Typically, they don’t extend loans when the monthly repayment accounts for more than half of an individual’s monthly income.
If you are in a position to take a loan, go shopping. Never compare loans by the cost in percentage quoted by lenders, as the mode of calculation of interest (monthly rests or annual rests) can paint an inaccurate picture. Instead, find out the amount you need to pay every month, the equated monthly instalment (EMI). On an identical loan value and tenure, the lender offering the lowest EMI is the cheapest. Other loan variables like deposit (or margin money), administration fee, processing fee and repayment schedule also make a difference to your outflows. So, run through the terms with a tooth-comb. Here’s a low-down on what’s on offer and what to look for in the different loan segments.
Interest rates on housing loans are down to single-digit levels (see table). Within home loans, you have the choice of fixed rate and floating rate loans. As the terms suggest, in fixed rate the interest rate stays constant through its tenure; in floating rate loans it is calibrated to interest rates in the economy. Floating rate loans are a good option when interest rates are falling, like it was a couple of years ago. After the spate of rate cuts since, further reductions may be marginal at best. So individuals are better off with fixed rate loans.
While interest cost should be your prime consideration, do look at other value-added services lenders in the housing finance space, especially those involving finer details of property purchases. Says Suresh Menon, GM, HDFC: "For instance, lenders should help you determine if the legal title of the property you are planning to buy is good." Some financiers are finicky about lending to individuals from certain professions, so it’s always good to have a pre-check done, to know whether and how much you are eligible for.
Even with a monthly income of just Rs 5,000, you can find financiers willing to structure a car loan for you nowadays. Industry estimates say 70-75 per cent of new cars today are financed, compared with 50-60 per cent in the early ’90s. Interest costs range between 13-16 per cent for private and foreign banks and 11-13 per cent for public sector banks. Having said that, it’s a user-driven market and there’s scope to drive home a hard bargain.
Competition is fierce and manufacturers, dealers and financiers are working in unison, pulling out all the stops for your custom. Dealer discounts are being structured into the loan, direct selling agents are passing on a big chunk of their commissions to the buyer. Some dealers also offer freebies like free registration, insurance, car accessories. If you don’t opt for such add-ons, you can lower borrowing costs further. The deal on which you incur the least outflow and get the maximum freebies is the one for you.
Whether you need money for marriage, vacation, paying off credit card dues, or even an emergency, personal loans come handy. Private banks and some finance companies are giving personal loans linked to your salary, without asking for any collateral or guarantors. Typically, the loan amount is 2-3 times your net annual salary, less if you are paying off an existing loan. While public sector banks cap the principal loan amount at Rs 1 lakh, private banks give up to Rs 10 lakh, for 3-5 years.
Private and foreign banks charge 17-23 per cent a year, while public sector banks charge 14-16 per cent, which clearly shows that lenders aren’t inclined to lower interest rates in this segment. Delhi-based Rohit Goel, 25, a process developer with a leading mnc, took a Rs 1 lakh loan from HDFC Bank for his marriage last January. "The rates never go down on personal loans. I am paying interest at 19 per cent at a reducing rate, which works out to 10.5-11 per cent flat," he says.
Public sector banks score over their private counterparts on other cost parameters like processing fee (Rs 200-500 compared to 2-3 per cent of the loan amount for private banks) and prepayment penalty (none compared to 2 per cent for private banks). However, public sector banks fall flat on service. Paperwork can be tedious, they ask for guarantors; some even ask your employer to stand guarantee for you! For those who think time and peace of mind is precious, private banks offer all the conveniences—at a price, of course. Says Iyengar of hsbc: "We see the personal loans market growing at a healthy rate over the next two years". And that could mean a drop in interest rates in this segment.
Education, especially higher education, isn’t getting any cheaper. Fortunately, relief is on hand in the guise of PSBs, who typically offer education loans up to Rs 7.5 lakh for pursuing an Indian degree and Rs 15 lakh for studying overseas. Banks do not ask for collateral on loans up to four lakh, though they do ask for a joint loan title, with the second party being the child’s parents. For loan amounts in excess of Rs 4 lakh, banks seek guarantors and collateral. Now that education loans have been included in priority sector lending, more action is expected in this segment.
Banks release the sanctioned loan amount within 15 days of your child receiving admission. The loan is usually disbursed in tranches, with the repayment period ranging between 5-7 years. Once the loan is disbursed, you have to start paying interest. Alternatively, you can opt for a flexible repayment schedule, where you to start repayments only when you start working or a year after the course is completed, whichever is earlier. Some banks provide an extension of up to two years depending on your monetary situation.
Consumer Loans Loan disbursements for consumer durables like TVs, washing machines and refrigerators have gradually shifted from banks and finance companies to dealers, who have either tied up with a financier or peddle their own financing schemes, like the zero interest one. In this scheme, a buyer pays the maximum retail price (MRP) for the product in 12 equal instalments, of which four are paid in advance. Paperwork is limited to income slip, residence proof.
So how do dealers make money? Usually, they pass on a cash discount on the mrp if you pay cash down. But if you buy a product on credit and opt for a zero per cent loan, the dealer charges you the mrp, and uses the discount to bankroll the loan. Dealers charge 17-18 per cent, which is more than the 14-17 per cent charged by finance companies and 12-13 per cent by PSBs. The mark-up charged is the price for being a one-stop shop and ensuring quick processing of loan applications.
So, whether it’s that Rs 75,000 music system you’ve been dreaming about since college or moving to an upmarket location with a Rs 75 lakh house, you have plenty of financing options to choose from.
By Clifford Alvares with Arijit Barman in New Delhi