Bedazzled: Don’t take a loan to finance an impossible dream

Come the festive season and plastic and paper money weave their magic. It is the time for extensive shopping, acquiring gifts for near and dear ones. And yes, all this involves lavish spending. But hang on. There is more to some of these schemes than what meets the eye.

Many turn to banks that offer festival schemes and special discounts, for this is the season that is considered auspicious for purchasing property. Festival loans are offered by the Bank of Baroda, United Bank of India, Punjab National Bank and the State Bank of India (SBI).

SBI, for instance, offers festival loans and allows a concession of 0.5 per cent on the prevailing rate of interest for housing and car loans. There is also a reduction in the processing fee and a discount on the margin amount.

But one should be careful while borrowing money. Taking a loan from a bank where you have a savings account can sometimes lead to problems. “It is advisable that a consumer takes different facilities from different banks since some banks deduct charges from savings accounts if there is a delay in the repayment of the loan,” says Arun Saxena, president of the International Consumer Rights Protection Council in Delhi.

He emphasises that in any transaction with a bank, be it for a loan or a credit card scheme, it is important that every single deal be done on paper, in the absence of which the client should ask the bank to cancel the deal.

According to Saxena, keeping a copy of the loan application is necessary. If the client doesn’t have the required papers, it is difficult for him or her to seek redressal if a problem arises in the agreement between the bank and the borrower. Loans should also not be accepted over the phone.

The loan applicant should also find out whether the rate of interest is being reduced monthly, quarterly or annually, and what happens if the applicant wants to pay back the loan before time. “In the case of early repayment, it is important to know if there is a prepayment charge,” says Shibu Das, a chartered accountant and director of Goldstar Financial Services Private Limited.

Loans that involve advanced equated monthly instalments (EMIs) should be discussed threadbare, for advanced EMIs can effectively reduce the loan amount. For example, a person borrowing Rs 1,00,000 with three advanced EMIs, each of Rs 10,000 amounting to Rs 30,000 payable at the time of borrowing, effectively gets a loan of only Rs 70,000. Clients have to make sure that they get the actual sum of money that they intend to borrow.

Some offers involve banks tying up with consumer goods companies that give you a discounted rate if you make a purchase using the credit card of a particular bank. For example, a user of a credit card may be offered a mobile phone at what they think is a reduced rate if they use the card for payment. But it doesn’t always lead to a bargain.

“Banks usually take a surcharge from the dealers offering cheaper prices whereas the same product could be priced at a lower rate in the market,” says Tarun Chakraborty, a former banker and consumer lawyer.

Chakraborty also cautions customers against getting lured into schemes that do not spell out the number of EMIs. “It also happens that in any advance loan given by a bank, the bank charges the interest on a daily basis whereas interest is to be paid on a monthly basis and therefore the total interest charged is more than what one would expect,” he adds.

In the case of a loan, the interest charged should not be more than double the principal amount borrowed, according to Prabir Basu, working president of the Bengal Federation of Consumer Organisations. “It is important to note that the EMI is within an acceptable limit before one goes for a loan,” he says.

One should also be careful of flat rates of interest offered by banks. A flat rate is interest charged on the full amount of a loan throughout its entire term. “However, a flat rate never reflects the actual cost of the loan. The only reason a lender ever quotes a flat rate is because he is not willing to tell you the effective rate of interest, which is much higher,” says Harshvardhan Roongta, a financial analyst and chief executive officer of Apnaloan.com, which provides financial advice to customers.

Sometimes, a client can be charged for not accepting a deal. “Keep a photocopy of the application form and get an acknowledgement — with the full name and designation and the mobile number of the bank representative — to prove your case that you never asked for the service,” says Roongta.

Most analysts and planners agree that spending within one’s limit is quite normal and there is no reason to shun it during festivals. The one thing to keep in mind is not to dream about possessions well and truly beyond one’s capacity. “In that case, the dreams become nightmares,” says Saxena.