Do you know you can bargain with your bank to get a cheaper personal loans? Do you know what factors banks consider before they actually give you the money?
What are the charges you pay when you try to pay off your loan before the due date? Is the prepayment fee imposed on the balance outstanding or on the entire loan amount?
Is there a maximum rate beyond which banks cannot charge you on that personal loan?
What should the gap between disbursement of money and the date on which you make your first EMI payment be?
In a chat with readers on May 22, Get Ahead personal finance expert Harsh Roongta answered these and many more queries related to personal loans.
For those of you who missed the chat, here is Part I of the transcript.
mama asked, Sir, If I want to take a personal loan worth Rs 10 lakhs then which is the best bank that I can go to? Also, what are the documents required for the same. Please advice.
Harsh Roongta answers, Loan applicants often ask which bank offers the lowest rate of interest or which is the best bank. While banks keep publishing or advertising their interest rates for various personal loan products from time to time, there is more to the published interest rate than meets the eye.
Two loan applicants to the same bank may get a different rate. The advertised rate may not be applicable to them. Also, even for similiarly placed consumers, there is no such thing as a 'standard rate' for a particular bank. The rate published by banks is a 'rack rate' on which significant discounts are usually available.
Your ability to get the best rate depends on two factors:
a) Your profile -- are you talking to the bank that is most interested in a profile such as yours? The greater the bank's interest in your profile, the higher the chances of their offering a discount
b) Your bargaining power -- are you talking to multiple banks? In general, loan applicants who talk to two or more banks are effectively lining up alternatives. Playing one bank against another often helps but the key is not to overdo. After all, the threat of losing business to a competitor must look realistic and credible to the bank for it to lower its rate.
So, the key question now is: how does one go about getting the best rate? Imagine you are at a market trying to sell mangoes. The only way you can find out if you are getting the best rate for your mangoes is to let prospective buyers inspect the fruit and then compete amongst themselves so that you are able to determine who the highest bidder is and how much the highest bid price is.
Taking a loan is a matter of you selling to the bank how easily verifiable your income is. In the above example, replace mangoes with income proof documents and replace prospective mango buyers with prospective banks. Then, let the prospective banks examine your income documents in much the same way mango buyers would examine the fruit.
We recommend the following steps:
1) Enquire at all possible banks offering the kind of loan you are looking for or apply at a loan marketplace that offers free services -- an example is www.apnaloan.com.
2) When the bank approaches you, provide photocopies of as many documents that give proof of income as possible. Documents that interest bankers include income tax returns, bank statements, Form 16 and your salary slip.
3) The rate that you would be offered after your documents are looked at by the bank would often be lower than what you are offered at the first meeting. So do not take any decision before the bank reverts to you after examining your income documents.
4) Shortlist at least two banks (who offer the best possible rates and other terms relevant to you).
5) Scrutinise the draft loan agreement to ensure that there are no hidden clauses that could affect you adversely. For example, several well-known banks have been known to introduce fine print in agreements that protect themselves but leave the loan applicant high and dry when certain drastic events happen. If necessary, seek the advice of someone in the industry that you know and can trust. Only then make your decision
dxvx asked, Hi, I have taken a personal loan for Rs 2 lakhs for 36 months. I have already paid the EMI for 15 months. I want to foreclose the loan. The bank has sent a foreclosure statement as per which I will have to almost pay the remaining amount with full interest. So is it beneficial to foreclose?
Harsh Roongta answers, It is difficult to comment without looking at specific facts. But, normally, the banks charge a pre-payment fee of around 3-5 per cent for prepayment of a personal loan. It is highly unusual for the bank to charge the interest for the remaining unexpired period of the loan.
Anand asked, Is there any ceiling for personal loan interest rates? One private bank is charging 46 per cent on reducing interest rate. Is this acceptable?
Harsh Roongta answers, There is no regulation that governs this except for the fact that RBI requires that the maximum rate to be charged by the bank has to be fixed by the board of directors of the bank. Forty-six per cent interest does appear to be on the very high side and is likely to have been charged for what is referred to as 'small ticket' personal loan.
Your best bet is to scout around in the market before taking the loan and use the services of loan market places to get the banks to compete for your loan.
task asked, Sir, personal loans are disbursed and are not given full one month time as the term EMI denotes. Also foreclosure rates are at 5 per cent but they are charging more. Why so kindly clarify?
Harsh Roongta answers, Very interesting question. You are right as the term EMI denotes the payment should be due one month after disbursement date (or first payment on disbursement date and the next payment after one month depending on the terms of the agreement). Normally, banks allow the consumers to choose between 2-3 EMI payment dates. Consumers can ensure they get full benefit by asking for disbursement exactly one month before their chosen EMI date.
Prepayment charges are normal banking phenomenon across the world. Though 5 per cent does appear to be rather high but again a lot of banks charge that kind of prepayment charges. The good news is you can negotiate these charges as well (take care to get any promise in writing and incorporated in the loan agreement) by making the banks compete for your loan.
Ravi asked, Dear Sir if I take a personal loan, then will I need to show the loan amount as income in my IT return and add that up to my salary and pay tax on total?
Harsh Roongta answers, Loan is not an income so there is no question of paying tax on it.
Subrata asked, Sir, we have applied for an educational loan amount of Rs 7.5 lakhs for my brother. The loan amount will be disbursed in installments depending upon the time for paying of tuition fees. Now, my son has the chance of getting scholarships every semester if he gets within top 10 ranks, in which case the fees for the next semester will be halved. Now can we ask the bank to disburse lesser amount for those installment(s) so that the final/total loan amount becomes less?
Harsh Roongta answers, I am sure that should be possible though they may not refund any processing fee that may have been charged based on the higher sanctioned loan amount.
reddy asked, When we are going for a prepayment of loan, the prepayment fee which the bank charges will be on the remaining amount or on the total loan amount?
Harsh Roongta answers, Prepayment fee is usually charged on the amount that is being prepaid.
rennythomas asked, I am using credit cards in India. Now I am moving out of India for employment. Should I surrender this card or continue with this? All cards are International valid.
Harsh Roongta answers, You become a non-resident once you go overseas for the purpose of employment. You should inform your bank about your changed status and cancel your Indian cards as Indian banks (to the best of our knowledge) do not issue credit cards to non-residents.
In any case, having a rupee credit card and spending in foreign currency will be an expensive proposition for you. The foreign exchange conversion rate will be very stiff and the eventual amount that you need to pay will be much higher than if you were to take your credit card in the country in which you are going.
phaniraj asked, I have taken a personal loan one year back at an interest rate of 14 per cent. I can repay it, but I don't want to because they are ready to give me a top up on this loan, which I may need next year. Is my thought process correct?
Harsh Roongta answers, You will be eligible for the top up loan (or another new personal loan) whether or not you prepay this loan. So the decision to prepay should be taken on a financial basis. It should be based on the alternative returns you will get on your surplus money and the prepayment charge leviable for prepaying this loan. Incidentally, before you go for a top-up loan, please scout the market and find out the best deal for you before freezing on the personal loan.
Part II -- Is a personal loan the last option?
Part III -- Need an education loan? Here's help
Harsh Roongta is the CEO of apnaloan.com, a site that help people get the most competitive loans.
