It’s the festive season starting from September right up to the start of a brand new year. It’s also the time for most manufacturers and retail outlets to line up new launches and other products in their portfolio and dress them up in attractive discount packages and waivers.
Most consumers would be tempted to buy a brand new car or that essential washing machine to avail the offers on them. What if you need short term funding for such needs? To meet the needs of these consumers loans too come attractively packaged at this time of the year!
Both private and public sector banks offer special loans at discounted interest rates for the festival season. This is the period when consumer spending increases and banks look to latch on to the opportunity by offering loans at lower interest rates. This in turn fuels consumption further. Festival loans are convenient for people who want to borrow a not-so-large amount and have the ability to repay early. Banks also sell home loans and car loans at teaser rates during the festival season.
Bank of Baroda disburses loan between `5,000 and `50,000. The range of amounts disbursed by other banks is not much different from this. The loan processing fees are smaller for festival loans compared to that of others. Mode of repayment is usually equated monthly installments (EMIs). First installment commences from the date of salary after loan disbursement or one month after the disbursement, whichever is earlier. Repayment period, usually at around 10 months, is smaller than that of other varieties of personal loans. An additional benefit is the waiver of penalties for partial or full repayment of loan.
Although RBI is expected to hike its policy rates by 25 basis points on September 16, the banks might not translate this to a hike in lending rates before at least mid-November. Banks would be looking at aggressively building their loan books during the festival season and hence will try not to rock the boat, which could dampen the demand. Consumers avail of loans to finance big-ticket purchases such as cars, homes and consumer durables.
This year, strong demand is expected from the hinterlands too. Monsoon has been good this year, which is expected to lead to a bountiful harvest of the kharif crop during October-November. Rich Indian farmers are expected to borrow for purchase of tractors, among other consumer durables. This year, banking behemoth SBI has announced that it will offer teaser rates for the festival season. HDFC has introduced a teaser home loan scheme: the Dual Rate Home Loan-4 (DRHL-4). Under the scheme, the rate of interest to be charged is structured this way: fixed rate of 8.5 per cent (teaser rate) between September 2010 and end-March 2011, fixed rate of 9.5 per cent between April 2011 and end-March 2012, and a floating rate thereafter.
The offer is available to all home loan customers who apply before September 30, 2010, irrespective of loan amount. Until 31 December, Punjab National Bank is offering the following to lure consumers: 50 basis points rebate on car loans, lower housing loan rates, and no processing fees on loans until the end of 2010.
However, there are a few disadvantages of EMI based purchases. Simple arithmetic suggests that you are paying more for the product than you would have if you paid from your own pocket. The logic is simple, if you are financing say `10,000 purchase through borrowing; you have to pay interest on the amount borrowed. Therefore, the amount you end up paying for the product much more than the price. There is another significant source of risk when financing purchases though loans.
Consider the case of a home loan. During the festival season, banks offer a teaser rate on loans, which is lower than the market rate. A few months into the tenure of the loan, the teaser rate is ramped up to market rates or the rate is kept floating.
In an economy where interest rates are expected to rise, like the Indian economy, the interest charged on the loan would keep going northward if it is a floating rate loan. This would translate to higher EMIs and put pressure on monthly budget of the consumer who obtained the loan.
(The writer is CEO of bankbazaar.com.)