09 Oct 2017 16:34 IST

Shopping for loans

As the festival frenzy grips shoppers, banks are getting into the act by offering attractive loans

Are you bitten by the shopping bug? With Diwali round the corner, it’s sure hard to miss the slew of offers and discounts hitting the market. What’s more, it is that time of the year when banks roll out the red carpet for consumers, offering best deals on various loans to keep the shopping spirit high.

But irrespective of the festival offers, borrowers can, in any case, shop for best rates in the market. After lowering its key policy rate by 200 basis points, since January 2015, the RBI chose to hold rates last week. Given that there is limited scope for a sharp fall in lending rates from here on, borrowers putting off big-ticket purchases should lock into best rates for now.

We look at various categories of loans and suggest some of the best deals in the market, besides the festival offers too. Do note, though, that the list of offers may not be exhaustive.

So how can you add colour to the Festival of Lights? Read on to get cracking.

Homing in

Diwali is often considered an auspicious time to make big-ticket purchases, like buying property. If you have been waiting on the sidelines for lending rates to fall further before taking a home loan, quit playing the waiting game.

Lending rates have already dropped by over one percentage point over the last one year, thanks to the new marginal cost of funds-based lending rate (MCLR) that the RBI introduced in April last year. This new lending rate structure has forced banks to lower rates at a faster pace.

So which banks offer the best deal?

For loans up to ₹75 lakh, Dena Bank’s loan rate at 8.25 per cent appears the top draw for now. Central Bank of India and Union Bank of India are next, offering loans at 8.3 per cent. Bank of Baroda offers home loans at its one-year MCLR of 8.35 per cent.

This home loan product is unique as it links the rate on your home loan to your credit score. If you have been settling your bills on time, and have a credit score of 760 and above, then you are eligible to get home loans at this rate.

Other leading banks, for now, offer only one rate for all borrowers, irrespective of the credit score. SBI and Axis Bank price their home loans at 8.65 per cent.

But why go for a floating rate loan at all? If you love predictability in your monthly payouts, you may like to consider fixed rate home loans. While interest rates are close to bottoming out, remember that home loan is a long tenure product.

Given that interest rates tend to go through up and down cycles, locking into pure fixed interest rate loans now could be a losing proposition later on.

Also, lenders usually charge a premium for the predictability offered by fixed rate loans. ICICI Bank, for instance, charges 9.85 to 10.10 per cent for loans above ₹30 lakh. This is more than a percentage point above the bank’s floating rate at 8.7 per cent.

What’s on offer? Aside from cutting rates, banks have also been offering various other goodies (not specifically festival offers) on home loans to make the deal sweeter. For instance, ICICI Bank’s Step Up home loan allows you to avail higher loan amount compared to your eligibility under normal home loan. This takes into account your future earning potential and the eligible loan amount (offered under a normal home loan) can extend up to 20 per cent. Young professionals who prefer to buy a home early in life are usually constrained by their existing income. Here, ICICI Bank’s product can offer more flexibility. But do note that the onus of additional payout in the following years can pinch if your income level does not rise accordingly.

ICICI Bank also recently launched ‘cashback’ home loans where it offers a 1 per cent cashback on every EMI. You can either choose to adjust the cashback against principal outstanding on your home loan or take direct credit in your bank account.

Let us assume that you take a loan for ₹60 lakh for a tenure of 30 years at ICICI Bank’s current home loan rate of 8.7 per cent. If you choose to take credit into your bank account for the cashback, then you will save about ₹169,156 over the tenure of the loan. On the other hand, if you choose to adjust the cashback against your principal outstanding, then you stand to gain around ₹7.6 lakh over the tenure of your loan, thanks to the power of compounding!

While the normal home loan rate offered by ICICI Bank is about 40 bps higher than the cheapest loans, the cashback offer makes it a much sweeter deal.

Banks have also been going all out to offer the best deals for the affordable segment (loans up to ₹30 lakh), which are 25 to 30 bps cheaper.

Bottomline: While there haven’t been specific rate cuts on home loans for the festival season so far, the steep fall in rates over the past year is good enough reason for you to go rate shopping.

Celebratory drive

Have you been eyeing that swanky car? Then picking up one now may not be such a bad idea. The market is flooded with mouth-watering discounts on select models by various auto manufacturers. So how do you fund your dream wheels?

While dealers arranging for loans either through their captive finance arms or tie-ups with various banks is convenient, opting for a bank loan offers more flexibility and choice.

There are mainly three things to consider when zeroing in on vehicle loans. Interest rates for sure, maximum loan amount in terms of ex-showroom or on-road price, and processing fee and other charges.

Banks charge interest rates either on a fixed or floating basis. While the fixed option may offer predictability, most banks currently charge a notable premium for it (see table). Also, while rates are unlikely to fall significantly from here on, it may still be a good idea to go for floating rate option, to benefit from token cuts in lending rates.

The next factor to consider is the maximum loan amount that the bank offers. Banks generally offer 85-100 per cent of the cost of vehicle as loan, depending on various factors. Here, the cost of vehicle could either be the ex-showroom price or on-road price. The former includes manufacturers’ cost, dealer margin, and the cost of transportation. The latter includes road tax, cost of registration and insurance.

Each bank sets its maximum loan amount based on either ex-showroom price or on-road price and hence taking note of this is imperative. Also, do factor in various charges — processing, prepayment, etc. Banks usually charge processing fee as a percentage of the loan.

Once you zero in on the bank, deciding the tenure of the loan is also important. Banks generally offer loans up to tenure of seven years. While choosing a longer tenure can reduce your EMI, remember that you only end up coughing more interest over the tenure of the loan.

Also, many of us prefer to change cars often, as auto manufacturers keep launching new models. You also tend to get better resale value for your existing car if you decide to exchange it sooner.

What’s on offer? This festival season, most banks do not have any specific offers on interest rates for car loans. But many have waived certain charges applicable to these loans. Bank of Maharashtra, PNB, SBI, and United Bank are a few that have waived processing fees for the festival season.

While saving on a couple of thousands sounds good, don’t take up the loan just for the offer. Also, most of these offers are time-bound. Availability at the dealer end will determine the waiting period for your car, which could exceed the offer period.

Bottomline: Most banks only offer waivers on specific charges. It would be ‘penny wise, pound foolish’ to consider a loan just for the offer. Remember, interest rate, maximum loan amount and other eligibility criteria set by each bank hold more weight while deciding on the loan

Goodies up for grabs

You may not be keen on big-ticket purchases. But hot deals, both online and offline, on select items such as electronics, can sure be hard to resist. It’s also that time of the year when a little splurge can be particularly gratifying. Banks and non-banking finance companies also throw in extra goodies to make your purchases easier on the wallet.

There are usually three options to consider — credit cards, personal loans, or consumer durable loans. Which one should you opt for?

Each option has its own pros and cons depending on various factors such as cost, convenience and time.

If you are short of cash and time, the best way to fund your purchase would be to swipe your credit card for the full amount and enjoy interest-free credit, usually for over a month (based on your billing cycle). But that’s provided your buying is well within your overall credit limit and you are sure to pay back in full in the following month.

Remember, banks charge 2.5-3.5 per cent per month on credit card dues, which can amount to a whopping 30 per cent and upwards annually.

If you are not able to, or are not willing to use credit card for your entire purchase, what are your other options? Given that banks, with their tie-ups with various retailers, merchants and online sites, offer some chummy cashback offers, let us explore other options available under credit card.

Banks offer you the option of converting your purchases made through credit card into EMI — in other words, you can shop in full and pay in parts. The main advantage of this option is that it offers you hassle-free finance, with no documentation.

But there are several costs and conditions attached to it. For one, banks charge you interest and processing fee on such loans, which varies across banks. Your credit limit will be blocked for the loan amount and each bank offers a specific tenure ranging from three, nine, 12 to 24 months. Also, you cannot avail this option in case of gold and jewellery purchases.

The key deciding factor here is the period for which you want to avail the loan and the rate of interest that a bank charges. ICICI Bank’s instant EMI (on credit card) offers tenure option ranging between three and 24 months, at a rate of interest of 13-15 per cent per annum.

If your loan tenure is short, then despite the interest rate, this option would score over, say, a personal loan, which is offered by the bank at 10.99-22 per cent interest per annum. But if your tenure is close to a year or more, opting for a personal loan may work out better. Of course, there is the hassle of documentation.

HDFC Bank’s smart EMI comes with 1.5 per cent interest per month, so does Axis Bank’s EMI option. Here again, choose to convert your credit card purchases into EMI only if your duration is short.

While ICICI Bank charges no processing fee on credit card loans, HDFC Bank and Axis charge 1-1.5 per cent of loan amount or ₹150, whichever is higher. Aside from personal loan and credit loans, you also have the option of taking consumer durable loans. Banks or non-banking finance companies tie up with particular dealers or merchants and offer consumer durable loans on specific products. In terms of convenience, these loans may score over a personal loan. While some amount of documentation is required, generally banks and retailers try and process the loan quicker.

In terms of interest rate, the biggest draw here is the ‘no interest’ offers that run through the year at certain retail outlets. However, processing charges are levied. If you are looking for only a specific product, then this option scores over personal and credit card loans. However, do remember that such loans are available only with certain merchants and for specific products.

What’s on offer? Various offers from banks — across personal, credit card and consumer durable loan — this festival season make it more pocket-friendly for you to grab exciting deals.

Normal offers aside, many banks have tied up with merchants, offline and online, to dole out additional cashback offers and discounts on credit card purchases. To make the deal sweeter, many banks have special rates on credit card loan (conversion into EMI option).

ICICI Bank, for instance, has a special offer for purchases of ₹10,000 or more up to October 20, 2017. The bank is charging an interest rate of 1 per cent per annum, but only offers a three-month EMI tenure option. So, if you are looking at a shorter tenure, the deal works out much cheaper than a personal loan.

Also, some of the online players such as Flipkart and Amazon, along with banks, offer no-cost EMI on credit card purchases on specific products. Here, while the banks continue to charge you interest, it is deducted from the upfront purchase price. This, in effect, gives the benefit of a no-cost EMI.

For instance, if a mobile costs ₹40,000 on Amazon, and the interest charged to you on this for credit card loan is ₹869 (three-month EMI with ICICI Bank at 13 per cent per annum), then you get an upfront discount on the cost of the mobile (similar to your interest). However, your bank may charge you GST and other taxes on the interest component of the EMI.

On the personal loan front, many banks have waived processing fee or capped it for the festival season. But it may not be material enough for you to take the plunge.

Bottomline: If you need a loan only for a short period, then converting your credit card purchases into EMIs is a good idea. The no cost EMI option online only makes the deal sweeter.

While it’s pretty impossible to buy everything you need with cash, it is imperative to keep a check on your credit purchases. Impulsive buying can cost you dear later. Rather, make the most of discounts and loan offers this festival season to ring in the cheer. Happy buying and happy Diwali!

(The article first appeared in The Hindu BusinessLine.)