Recent New Year discount sales made crores of sales for the shops. And, banks in collusion with the shops, also made a killing.
These consumer loans are a convenience with a cost and I have availed them. Because, the loan amount being small - Televisions Rs.12, 000 to Washing machines / AC Rs.25, 000 - the difference in absolute amount is less, say Rs.500 overall.
The trouble is the way these banks lure innocent customers, who may not be aware of the costs.
I wish to here explain the true nature of these’free credits’ for consumer durables. These are being touted as’0% Interest’ scheme. They will explain to you that, For the same value of the cash payment, You are given an option to pay in instalments over a period of 8 months.
A typical scheme by ICICI goes like this.
First, they will add 3%’documentation charges’ to the cash payment. This is 3% added.
Then, there will be a down payment(in cash) minimum you have to make. This is 25%. This payment is straightaway made by you to the shop and the loan is only for the rest(75%). But, the banker will cooly calculate 3% on the total value. So, In effect that is much more as I will show you below.
They then take a cheque for 8 more months. The payment is made’upfront’. (Means, the instalment is at the beginning of the period. Jan instalment is payable in Jan 1st and so on. This means you pay interest for the instalment paid also.)
The due date start from the date you sign the papers. The actual loan clearance will take 3 days and the shop will receive payment and deliver the goods after 3 more days. So, In effect the down payment is free for them for a week. And, the you are paying interest for the whole loan one week extra.
Also, the shop pays to the bank about 2%(minimum) discount for the value of the loan. This is because they would have paid 2.5% charge to credit card if the customer has used a credit card.
So, What this all boils down to?
I took a loan for AC(Rs.25, 240) last week. See the calculation below.
Amount
01/01/2003 25240 AC value.(excludes doc charge)
After 2% discount to bank Rs.24, 735.20
01/01/2003 -9171 paid by credit card
07/02/2003 -2104 Instalment 1
07/03/2003 -2104 Instalment 2
07/04/2003 -2104 Instalment 3
07/05/2003 -2104 Instalment 4
07/06/2003 -2104 Instalment 5
07/07/2003 -2104 Instalment 6
07/08/2003 -2104 Instalment 7
07/09/2003 -2104 Instalment 8
Interst per month - 1.30.%
Cumulative interest for eight months 12.356%
Annualized interest 16.48%
As shown above, the loan is not free and costs 16.48%.
This is the atrocious rate banks are charging. Do you know that the average lending rate to BIG BIG corporations is now at 7% p.a and falling further. That is, if you are a big shot and take a loan for say 10 crores, you pay 7%.
But, if you are a consumer, You pay 16.5%. (Credit card suckers pay upto 30%).
Now I hope You know the meaning of’0% interest’.
Also, You will realise why banks are falling over each other to give consumers loan.
This sort of profiteering is not only confined to these’new-age’ banks with lot of pretty young things moving around. I went to SBI and asked them how much interest they charge on the loan taken against my own Fixed Deposit with them. For a bank, this type of loan is the safest. Even safer than the government bond.
They said presently the rate is 12%. I ran away from there.
If you need these con-scheme called’0% interest’, Avail it by all means. But, Know that 0 means 16.5 in banking terminology.
One more thing. Even though you pay 25% down payment and get loan only for 75% of the value of the product, they will ask you to sign a promissory note for the full 100% value. This will enable them to recover 100% in case of any default. So, You are giving actually 125% collateral(security) for your loan. This is another unwarranted thing.