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Know your Loans

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Cross-check the costs involved and interest rates of a loan, not just the speed of approval, before taking it

Let us take a look at three major types of loans that many individuals take and the real cost of taking those loans.

Personal loans
Banks such as ICICI Bank Ltd, HDFC Bank Ltd, Axis Bank Ltd andKotak Mahindra Bank Ltd, among others, offer 'instant' or pre-approved personal loans. If you are planning to take one of these loans, here are some things that you need to check.  The time line to get a personal loan for existing and new customers has come down drastically. Though your bank may give quick approval, one should definitely shop around to get competitive interest rates.

Personal loans are easy to get, but expensive to repay. Since a personal loan is an unsecured loan, the interest rate on it is higher-ranging from 11.59% to 32% per annum, depending on your income, profile, the company you work for and residential status. You can get a maximum loan amount of R40 lakh, depending on your job profile. The tenure for these loans is generally 12-60 months. Besides the interest rate, you need to check the processing fee, prepayment charges and late payment charges on the loan. For instance, if you take a R5 lakh personal loan at 14% interest rate for 5 years, you will end up paying back the lender R6.98 lakh. Your monthly instalment will be R11,634. Usually, the processing fee is 0.25-3% of the loan amount, which the banks charge upfront.

So for the same loan amount, if the processing fee is 2%, you will pay R10,000 as processing fee. Some banks charge a flat fee. In case you want to foreclose your loan, the foreclosure charges can go up to 5% of the outstanding loan amount.

Auto loans
While you can get auto loans on floating as well as fixed rates, most banks offer a fixed rate loan for automobiles. Like personal loans, auto loans also come with costs such as prepayment, processing and foreclosure charges. If you are buying a new car, the interest rate is in the range of 9.65% to 14.50% per annum. However, for a used car the interest rate is higher: 10.90-20% per annum. The interest rate varies across banks. Say, you take an auto loan of R6 lakh and the interest rate is set at 13% for a 5-year period, your total outgo will be R8.19 lakh. The processing fee for auto loans is between 0.2% and 1% of the loan amount. In the same example, if the processing fee is set at 1%, your processing fee will be R6,000. Banks also charge a flat fee, depending on the loan amount. The tenure for these loans ranges from 1 to 5 years. But some banks may run promotional offers or schemes, and may offer loans of 7 years The tenure also depends on the type of car you wish to purchase. If it is a premium car, the tenure may be restricted to 3 years.

Home loans
Banks have recently changed the way in which they calculate the interest rate and have moved to marginal cost of funds based lending rate (MCLR) from base rate. In case of MCLR-based loans, the rates may get reset every 6 or 12 months, depending on the reset clause at the bank. At present, the interest rate on floating home loans ranges from 9.35% to 14.50% per annum. Processing fee is usually 0.25-1% of the loan amount. This is generally non-refundable even if your loan application is rejected. Say, you take a home loan of R50 lakh at an interest rate of 10% for 20 years, you will end up paying R1.15 crore (principal plus interest). This amount, of course, precludes prepayment and change in interest rate. A 1% processing charge will mean you have to pay R50,000 more on this loan.

Along with the charges and interest rates, look at how smooth the process is going to be. Since a home loan is a longer-term loan, you don't want to get stuck with a bank that doesn't service you well. You could talk to people who have already taken a loan from the bank that you plan to approach

What you need to do
Technology is helping banks evaluate customers. You as a customer should also make use of this technology. Even if your bank gives an instant loan, shop around for better rates. There are many online loan portals that give you details about the costs involved while taking a loan. You could cross-check the interest and charges on these websites. Avoid doing rough calculations; instead, use an online calculator or ask the bank for numbers to get the right picture.

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