10 things your lender won’t tell you
When you’re looking to get a loan sanctioned, your loan officer may seem the most important person in your life. And he, in turn, will have you think that you are the world’s most important person to him. You are the customer — the king.
But your friendly neighbourhood loan officer also nurses some deep, dark secrets. And he certainly isn’t going to let you in on them. For some secrets, particularly the ones that translate into pots of money, are well worth keeping…
But we’re not in it for the money, so we’ll tell you the 10 things your lender won’t tell you…
1. Upfront fees and costs increase the cost of your loan
Apart from the interest rate, there are other costs that influence the total cost of your loan. Apart from knowing how the interest rate is calculated, it is important to understand the impact of processing and administrative costs on your loan cost. They add to your costs as they have to be paid upfront. No lender will ever consider these upfront costs as part of your financing cost and tell you what the loan really costs you.
2. A longer tenure doesn’t always mean you’re better off
To get a higher loan amount, most people increase the tenure of the loan. But increasing tenure from, say, 15 years to 20 years only results in a small increment in the loan amount and a small reduction in the EMI. As against these minuscule gains, the amount of interest you will pay over the period of the loan is huge. Don’t expect the lender to tell you this. As long as he is satisfied with your repayment capacity, he doesn’t particularly care about what tenure you choose for the loan.
3. Your fixed interest rate is not so fixed
Interest rates are generally quoted by lenders as a certain percentage points (called the spread) over the prime lending rate. And the prime lending rate is no Rock of Gibraltar: it changes as and when interest rates go up or down. And, therefore, interest rates on your loan change too. Generally, then, loans are variable rate loans, with interest rates changing as and when the PLR changes. Some lenders do not have a PLR. In any case, loan agreements contain a clause which gives the lender the right to revise the interest rate if he so chooses. So, in fact, interest rates are never fixed.
4. When you prepay, always reduce the loan tenure
When you choose to prepay, the lender gives you two options, reduce the EMI or reduce the tenure. Lenders will not tell you that you should always opt to reduce the tenure. You will pay less interest over the loan tenure that way. If you’re worried about how tightly your finances will be stretched in the interim and therefore would appreciate a reduction in the EMI, remember this: your earnings are sure to increase over time, but there is no cause to give away your hard-earned money and line your lender’s pockets.
5. How your instalment is calculated
Lenders have different policies about when your loan repayments will start. Some lenders have a policy of receiving payments in the first week of every month. In such a case, even if the loan was disbursed on the 28th of the month, your first instalment will have to be paid in a few days instead of a month later. In effect, this is like paying an EMI in advance, an eventuality that only benefits your lender.
In these cases, what happens is that while these instalments are calculated on an arrear basis (paid at the end of the month), they are being collected on an advance basis (at the beginning of the month). Given an interest rate and loan tenure, arrear instalments are always higher than advance instalments. You pay the arrear instalment in advance, but you don’t get the advantage of the reduced EMI.
Others follow a slightly more benevolent methodology. Say your loan is disbursed on the 28th of the month. The lender charges simple interest for the remaining portion of the month and the first instalment kicks in at the end of the following month. But even this could be fairly large: simple interest for seven days at 13 per cent on a loan of Rs 5,00,000 is Rs 1,274! Also, beware of lenders who ask you to pay the instalment whenever you like — in any part of the month. More likely than not, they are charging interest at annual rests, where credit of principal repaid is accounted for only at the end of the year. So it doesn’t really matter which part of the month you pay.
6. It is rarely necessary to pledge extra collateral
Except in the case of a personal loan, which is generally unsecured (lent without the backing of any asset), lenders usually insist that the borrower mortgage/hypothecate the asset that is created using the loan amount. This is true of a home loan and a car loan. In these cases, it is usually unnecessary for a borrower to pledge extra collateral. Some lenders, however, insist that you assign life insurance policies or bank FDs as collateral. If you already have a policy and are comfortable about assigning it to the lender, do so. But remember that it is not really necessary. Moreover, by doing so, you lose the opportunity to cash in or pledge those assets if you require to raise cash or take another loan.
There is no need to pledge additional collateral if there is nothing wrong with your creditworthiness and you are well within all the norms of the lender. Instead, you could either cash in your FD and take a lower loan and explore the option of taking a loan against your insurance policy.
7. Approval can be swift, but only after the paperwork is over
Don’t be misled by advertisements that suggest that a loan can be granted in 24-48 hours. There is a caveat here. The loan can be granted in 24-48 hours, but only after the documentation is fully in and processed. And that could take awhile depending on how prepared you are. Even if you are, the chances are that the credit evaluation could throw up a demand for more supporting documents. Don’t count on the entire process taking place in a jiffy.
8. Lenders are not your counsellors
Lenders are not your counsellors. They won’t advise you on which loan type you should go for. And if they do, they will be concerned about pushing the loan type that benefits them most. Also, don’t look to the lender for advice on choosing the interest rate type. Things like: when to go for floating rate-based loan, or which is a better car finance scheme to go for — advance or arrear.
9. Loan agreements nearly always favour the lender
Remember, the loan agreements were drafted by the lenders’ lawyers. And they contain enough ifs and buts and therfores and theretos to protect the lender’s interest. Lenders frequently slip in call options on the loan; if enforced, this could force you to prepay the outstanding principal loan amount in a very short time. Also, some lenders tend to take cover under catch-all clauses such as “in keeping with RBI guidelines” or “according to NHB rules”. Question them on these and satisfy yourself about what you’re letting yourself in for.
10. Don’t overborrow
If your income is sufficient, chances are your lender will lure you to borrow up to the maximum possible loan amount so that he can meet his loan disbursal target. So guard against being hustled into overborrowing and in the process paying higher interest.
Source iInvenstor.com
April 16, 2007, will be remembered as one of the darkest days in the history of the Virginia Tech community and the world beyond.
