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Old 4th December 2010, 08:07   #1
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Default Never take a financier at "face" value

Some pitfalls that anyone dealing with auto finance companies should avoid based on an experience shared by a colleague.

Disclaimer:
I have a very basic understanding of loans and finance. What I listed here are my own opinions and I could be wrong about some assumptions. Please pitch in with your opinions if you disagree or have something to add, so that everyone (including me) can learn.

I have a very intelligent colleague in my office who is armed with an MBA from one of the best B-schools in the country. She holds a managerial position in a multi-billion dollar MNC - at the age of 25. Like all salaried individuals, she too wanted to own a car. Unlike all salaried individuals, (and despite her elite education), she trusted the agent from a large public sector bank, which is known for its "teaser" loans (possibly since the loan amount didn't seem like much).

She had decided to buy a new cool blue i10, and decided to finance a small part of the on-road price (although I believe she could have avoided it and made a complete cash payment).

Unless you have a liquid investment which can return at least 12-15% annually (such as equity, but then again there's no guarantee), you should liquidate it to reduce the loan amount. imho, after credit cards and microfinance, EMI's have the highest effective interest rates (Google "IRR" if you don't know what I am getting at).

Her father had been a long time customer of this particular bank. Being a public sector bank, it was assumed that the interest rates would also be among the lowest, if not the least. These two factors led my colleague to apply for a 3 year loan with this bank at rates of 8%, 10%, 10% for the three years respectively.

Since she didn't try to haggle at all (Being from a particular business minded community, I consider that criminal . Trying is essential! Another one of my favourites is "Whenever you're getting into a contract to pay somebody, assume first that you're being fleeced". Sorry for the diversion), so they happily charged the full processing fees along with insurance premium. AFAIK, this premium is to insure their risk not yours and I don't understand why the consumer has to foot the bill. The bank is having its cake and eating it too (there, I have been wanting to use that phrase for a long time ) as they're getting risk-free interest income (the point of charging interest is always that the lender is taking a risk after all).

Anyway, the friendly neigbourhood agent came and merrily put the loan amount inclusive of processing fees and this worthless insurance premium. She received a net loan disbursement of Rs. 2,47,xxx but she was being charged interest on Rs. 2,51,000. So effectively, the bank was making her pay for their risk, and earning income on that money also. You would think that that interest income would be very minimal (approx Rs 150 for a three year loan) but multiply it by the no of loans and you have a massive amount of FREE riskless and effortless income. Pardon me if I feel like opening a bank of my own.

But let's cut to the chase. Even for a loan of Rs 2,51,000, her EMI for the first year comes to Rs. 7,865 and for the subsequent 2 years, it is Rs 8,025. The agent promised her that he would go the extra mile and avoid all this hassle of changing EMI's and average it out to get a single magic EMI. And his magic number was ...Rs. 8,099!! She didn't bother to verify the numbers in her loan document, and was paying extra per month till recently. The conclusion of that story is unravelling even as you read this.

Moral of the Story:

I have seen a general perception that after all the initial hassle of getting a loan approved, PSU banks have "no hidden charges" unlike private banks which are ready to loot you at every possible opportunity.

I disagree.

I say, be unbiased about your distrust. Every financier is out to make the maximum money from you as possible (note that I didn't write legal) and will take advantage of your ignorance at every step (I write this based on not just this experience but also one of my own with this same very bank earlier w.r.t. education loan). So in the words of a famous ad campaign, "Jaago grahak, jaago!"
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Old 4th December 2010, 12:19   #2
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Thanks for the great effort in sharing your insights. Although I did not opt for a loan yet, I will be careful and alert when i do, eventually.
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Old 4th December 2010, 13:06   #3
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Thank you for that clear and though-provoking write-up.

Having just bought a car and having wrestled with the idea of taking on a loan as I did not have enough money, you have put in black and white my feeling of uneasiness with the whole concept of taking a loan.
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Old 4th December 2010, 18:39   #4
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@Archon - Here, what I see as a clear scape goat is...
Quote:
She holds a managerial position in a multi-billion dollar MNC - at the age of 25
AND
Quote:
it was assumed that the interest rates would also be among the lowest, if not the least
Like the proverb goes, hurry leads to worry.

Before providing the loan, the terms & conditions should be put down in black & white. I always make a point to compare the norms with 2 or more people from the same or different bank & now days...TBhp ; be it a iron box or car.

Yes you're right that Rs 8099 is little on the higher side even for the loan amount of 2.5L for 3 years & 8+10+10% rate of interest.
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Old 4th December 2010, 20:25   #5
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1. Unless your colleague is MBA in Finance, her education and position doesn't matter for the purpose of this discussion. And if that is the case, I would say Hats off to the agent who fooled a much more educated and so called intelligent person.

2. Taking insurance along with a loan is purely optional. IMHO, taking insurance is good for the borrower as well. I don't understand what you are cribbing about.

3. Interest rates vary from bank to bank and customer to customer. You just can't assume that a particular bank is giving you best interest rate. That's just stupidity.

4. You can't sign a document without reading it. That's stupidity again.

Sorry if I may have sounded rude, but your friend is entirely to blame. One doesn't need to be MBA in finance for understanding a car loan, even a person with basic common sense and presence of mind would have easily found out that she is being fleeced by the agent.

A wise man once said - If you think before doing something, you are intelligent. If you think while doing something, you are cautious. If you think after having done something, you are stupid.

Moral of the story - if you are going to take financial decisions based on assumptions and perceptions, you would be disappointed.

Rohan
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Old 4th December 2010, 22:49   #6
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Quote:
Originally Posted by rohan_iitr View Post
1. Unless your colleague is MBA in Finance, her education and position doesn't matter for the purpose of this discussion. And if that is the case, I would say Hats off to the agent who fooled a much more educated and so called intelligent person.
She's not. It's relevant because she has had one of the best educations this country has to offer in business administration, but still acted like someone who is unaware about dealing with other businesses; point being that it can happen to anyone who isn't careful.
Quote:
Originally Posted by rohan_iitr View Post
2. Taking insurance along with a loan is purely optional. IMHO, taking insurance is good for the borrower as well. I don't understand what you are cribbing about.
She was told that it was mandatory. I asked a guy who had worked in another PSU bank and he didn't know any benefit to the consumer through this. Please elaborate as to how it is good for the borrower so I don't feel guilty if I ever have to pay for this.
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Originally Posted by rohan_iitr View Post
3. Interest rates vary from bank to bank and customer to customer. You just can't assume that a particular bank is giving you best interest rate. That's just stupidity.
Absolutely.
Quote:
Originally Posted by rohan_iitr View Post
4. You can't sign a document without reading it. That's stupidity again.
She read the document, but didn't verify the numbers: amounts to the same thing. As an aside, I wanted to ask if there is someone from the bank who ever signs those green loan documents, or is it always one-sided.

Quote:
Originally Posted by rohan_iitr View Post
Sorry if I may have sounded rude, but your friend is entirely to blame. One doesn't need to be MBA in finance for understanding a car loan
True, but the majority of people I have had experience with are ignorant about EMI calculations, and even more so about how expensive EMI's actually are.
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Originally Posted by rohan_iitr View Post
even a person with basic common sense and presence of mind would have easily found out that she is being fleeced by the agent.
If you mean just running the numbers in an EMI calculator, then yes! Things like common sense and presence of mind are the first casualties of panic when your new car is getting delayed and the banker comes out with a document which you feel you have very little time to analyze and sign.

Last edited by Archon : 4th December 2010 at 22:52.
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Old 5th December 2010, 14:44   #7
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If I understand it correctly, when one takes insurance on a loan, it means that if the borrower happens to die during the loan tenure, the loan is waived off. That way, the loan doesn't become a liability on the family members of the deceased.

Taking insurance on loan is optional. If the agent told your friend that it is compulsory, she should have raised her voice and threatened to complain to the bank. If you don't object to anything, the agent will always try to pile on extra items which you may not need.

Its not that difficult to calculate your EMI. Before applying for the loan, ask your banker what is the EMI per lakh for the particular loan period. For example, lets say that the EMI per lakh is Rs 3000 for a loan tenure of 3 years. Then if you are taking a loan of 2.5 lakh rupees, your EMI becomes 3000x2.5=7500. For a layman, this approach is better instead of comparing interest rates.

One needs to compare the offers given from several banks, and if required, bargain with the bank for a better deal, just like one bargains in a fish market. It seems like your friend did not have the time and patience to visit the metaphorical fish market and bargain for the best deal. She chose to buy the fish from the neighbourhood supermarket, where there is no concept of bargaining.

The prices in the supermarket may be slightly higher compared to the fish market. Lets call is a convenience fee, which they charge so that you can avoid the hassle of visiting the fish market. Taking a loan through an agent without visiting the banks personally is something similar to buying fish from the neighbourhood supermarket.

So if there are 2 friends, one who buys directly from the fish market and the other who buys from the supermarket, then the friend who buys from the fish market can technically say that the supermarket cheats his friend by selling fish at higher price as compared to the fish market. Whereas the other friend might be happy to buy at a higher price from the supermarket, just to avoid wasting his time and energy.

Rohan
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Old 5th January 2011, 15:49   #8
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@Archon: A very clear and concise report. One thing I'm able to understand that the bank in question is SBI.

And before I state my true point, let me tell you all "Credit is a PRIVILEGE and not a RIGHT". In that perspective SBI is very clear that every loan that they disburse will need to be insured by SBI Life Insurance. If you as a customer don't like it, you are free to go somewhere else. After all the bank is not tying your hands and asking you to sign on the dotted lines.

But what really gets my goat is when a signed agreement is not honoured. I have a car loan with SBI too and its been more than 18 months. Last month I went to the branch to get the loan account and I see I have been charged standard 0.5% over and above the bank rate whereas my loan was supposed to be at 8% for the first year and 10% thereon. I was assured by the branch manager that It will get sorted but will need to go to their RACPC here in Hyderabad.


Bottomline: check and then re-check all your bank and loan accounts. Sometimes it could be a simple typo by someone that can put you in soup.

P.S: I will be in the market for another loan by closing the existing one and I'll still go with SBI or some other PSB as they don't have any hidden clauses unlike most private banks.

Last edited by MileCruncher : 5th January 2011 at 15:52.
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