Indranil Chakraborty, a software professional in his mid-thirties, was deep in debts when he met Prashant, his long lost banker friend, at a pub. Besides loans from friends and family, Indranil was saddled with a debt of Rs 50,000 on his credit card.
Friends, who would buy him drinks till the other day to make life a little easier, had started shunning him, terrified at the prospect of being 'touched' for a loan.
One evening, Indranil waddled over to his favourite haunt — a smoky, cavernous watering hole that had seen better days — to drown his sorrows.
That's where he bumped into Prashant.
After five tots, Indranil was garrulous: “I’m fine, but. you know, I have run into a debt trap of sorts. I find it impossible to pay my credit card dues .”
“Credit cards are like bottomless holes,” said Prashant. “Never keep credit card bills unpaid. You should pay off your dues at once.”
“I am trying to pay it down, but it doesn’t seem to work that well. How can I pay it off at once'” asked Indranil.
“Take a personal loan, and pay off your credit card dues at once. Repay the loan at your convenience. You’d save a lot by way of interest,” replied Prashant.
Next day, when office broke for lunch, Indranil told his boss he was leaving for the day. He took a cab to Dalhousie Square where he would shop for the best rate on personal loans.
He entered a new generation private sector bank and walked up to a ‘personal finance adviser’. “Hi there. You see, I have a credit card outstanding of Rs 50,000, which I want to pay off,” Indranil said.
“We’ll take it over, sir. For the first three months, there’s no charge. For the next three months, you pay 1.65 per cent only — 1.3 per cent lower than what you are paying right now. No bank can beat this,” said the personal finance adviser.
Indranil was confused. “What do you mean' You'll give me another credit card to which I could transfer the balance on my present card'”
“Exactly, sir. It’s a great offer, but for a limited period only. Your savings would be substantial, and on our card there's no limit on spending,” the young banker said. “The offer closes in a few days. Why don’t you sign in right now'”
Indranil wasn’t convinced. “You see, I don’t want another card. I want a personal loan.”
Banks that issue Visa and Master cards charge 2.95 per cent per month on dues. This means, if you had a balance of Rs 100 on your card and didn’t pay anything in a year, interest of Rs 41.74 would accrue on it.
American Express charges 2.79 per cent, while HDFC Bank, which is a bit more generous than others, charges 2.65 per cent. The best deal that you could get is 2.45 per cent, which HDFC Bank offers to its valued customers.
If Indranil chooses to get a new card and have the balance transferred to it, he could cut interest charges on his dues by up to 1.5 per cent, but only for the first six months.
Some banks would even offer an interest-waiver for the first three months, but after that period, he would have again had to pay 2.45-2.95 per cent.
Indranil couldn’t pay off his dues in three months — not even in six months. So, transferring the balance to another card was pointless.
Personal loans, on the other hand, are far less expensive. Private banks charge 16-24 per cent in annual interest, whereas nationalised banks — for instance, State Bank of India — charge 13 per cent plus 1 per cent of the loan amount as ‘service charge’.
Banks do not ask for any security, but the amount that you could borrow is linked to your income. You could borrow up to 11-12 times your net monthly salary and pay it back in equal monthly instalments in four to five years.
The minimum term for personal loans is one year, but a number of banks do not charge any pre-payment penalty. And by pre-paying it, you could save on interest.
You could cut interest rates on personal loans further by mortgaging securities like National Savings Certificate (NSC), RBI Relief Bonds, life insurance policies, and such securities that we commonly invest in to save on taxes.
State Bank of India charges 9.25-10.6 per cent on loans issued against pledge of securities. The interest rate varies with the security pledged and the term of the loan. Allahabad Bank charges 12-12.5 per cent on ‘secured’ loans, as against 13 per cent on ‘unsecured’ loans. (Secured loans are those that are issued against mortgage of securities.)
Borrowing from nationalised banks is a lot cheaper, which is what Indranil did, but his office had to give an undertaking that it would repay the loan if he defaulted or died before the loan was fully repaid.
Not everyone is as lucky as Indranil. Many are forced to borrow from private banks because their offices refuse to give such an undertaking.
If personal loans are so cheap, why do banks charge an outrageous rate of interest on credit card dues'
A senior banker says: “There are quite a few reasons. Delinquencies are higher. Add to it the cost of acquiring a customer, the cost of processing, the affiliation fee paid to Visa or Master, and the investment in technology.”
Of late, some private banks, too, have started offering personal loans to customers who have huge debts on their credit cards. The point of doing so is not only to make life easier for the customer, but also to reduce the odds of default.