Thursday, April 16, 2015

Got home-loan? You might want to read this..

In our lifetime, we've all lost money to thieves and pickpockets but it hasn't really amounted to much.   Maybe a few hundreds or if we were unlucky, a few thousands.  We spend so much time worrying about losing the new 1000 rupee note that we pulled out of the ATM yesterday.  But I realized recently that I'm losing more than a lakh in broad daylight (in a legal way), thanks to my laziness.

Like most middle-class citizens of our great nation, I too have purchased a home-loan (because its an investment, provides tax-benefit, bla, bla).  As most borrowers know, the interest rate on the loan is variable and it fluctuates with the market, yada, yada.  But I recently noticed that the interest rate in my home loan has been going only one way - UP, for the past 3 years.  I assumed that it's due to inflation - all costs go up more than they come down.

One fine day, my dad pointed me to a nice little article in the newspaper that said that my lender (ABC Corp) has reduced the interest rate from 10.xx to 9.9%.  Yet, my payment sheet with ABC Corp has been listing the interest rate as 11.xx.  Now, that's not right!  Then, my dad explained that the interest rate for existing customers is different from the interest rate for new customers.  In other words, you take a loan at 10.xx% and after an year, it magically turns into 11.xx% - TADA!

Apparently, last year, RBI had asked the banks to not charge different rates for existing vs new customers (as explained in this article).  It is believed that most banks have started following this, but we'll never really know for sure!  ;-)  Now, why is my ABC Corp not following this?  Because ABC Corp is not a bank.  As explained in this article, just because the name of the company is the same as the name of a bank, it doesn't necessarily mean that they are the same.  For example,


are different companies.  This means that the company with 'Ltd' in their name might not need to play by the same rules as the company with 'Bank' in their name.

Still, the huge difference in the interest rate kinda irked me.  So, I sent out a simple one-line email to the Manager at ABC Corp asking "will the interest rate for existing customers come down?".  To this, I received a lengthy reply with lots of financial jargon and what not.  I went through the entire mail a couple of times only to realize that, the reply was just a vague explanation about interest rates.  Essentially, they were trying to sound complicated and confusing, so that people won't raise questions about being robbed at daylight.  Being an avid gamer myself, I decided to take up this challenge and composed a lengthy reply with links to news articles about the fluctuations in the market and the interest rates, bla bla.  This time though, I received a proper one-line reply saying "We are expecting the rate of interest reduction".  Again, translated to plain English - "no", because the rate for me hasn't decreased even once in a past 3 years even though it has decreased a number of times for new customers at ABC Corp.

So, what's next?  Move out, that's what.  My friend Dhivakar introduced me to refinancing, where we move our housing loan from one lender to another.  Relief!  But not so fast.  You see, to move out of ABC Corp prematurely, I would again have to pay a penalty to ABC Corp.  I heard that RBI advised banks against penalizing the customers too much, but again, my ABC Corp is not a bank.  So, in essence, non-bank financial organizations will

a) charge less at first and then increase it later,
b) increase the interest rate for all customers but decrease the rate only for new customers
c) penalize the customers heavily for moving out

Yet, we go to these organizations for loan, why?  Because when the banks say "you can't afford this loan amount with your current salary", the non-bank lender will say "please come in, would you like a Coke while we process your loan?".

Why is this a big deal?  Why have I written such a lengthy post on this subject?  Because when I did the math, the difference in the interest rate translated to nearly 4 lakh rupees.  Four lakh rupees, earned from months of hard work.  This is why the middle-class, remain as middle-class.  We lack Financial IQ.  We leave the complicated maths to auditors and financial organizations and then wonder, why we are not rich yet!

Please, share this information.  Have meaningful and factual discussions with friends and colleagues about financial topics.  Knowledge is literally, wealth!