True cost of Personal Loans

A friend of mine took a personal loan from Citibank of value INR 1.1MM (11 Lakhs) but decided 12 hours later that he does not need it. To his surprise, he discovered that the cost of cancelling the loan was 80k. Here is how:
1. 1% processing Fee: 11,000/-
2. Payments for 6 months @30,614 p.m. = 1,83,683/- (4 years tenure)
3. 2% Pre-payment penalty: 19.912/-
4. Principal Left after 6 months 9,95,602/-
Total Payments: 12,10,197/- or a loss of 1,10,197/-
Of this he is able to recoup 30,373/- by reinvesting in a 6% FD of the same bank. This reduces the total loss to 79,824/- (or 7.26% of the borrowed sum)
I have always advised people to either borrow from friends/relatives or take a bank overdraft. Because there 15% interest means 15% and you will never have situations where you end up paying 7-8% for a couple of hours. Remember banks are predators who pose as friends.


Loan against credit card

Recently I came across this very interesting personal loan scheme. The merchant would swipe your credit card and max out your credit limit (say 30,000/-) and make a spot payment of 28950/- (he charges a 3.5% commission for these activities).
This thousand fifty of processing fees for the loan might look exorbitant, but actually it works out a lot less.

1. Most credit cards company would offer you a loyalty gift/cashback worth 1% or 300/- for this transaction
2. If you could match the billing cycle, then you can have a 45-50 day loan at 3.5% interest or 33.5% compounded annually. After accounting for the 300/-loyalty points, it comes to only 1.7% monthly which is lower than any other commercial loan of the similar duration. If you have multiple credit cards, then probably you could roll over this credit to longer periods at favorable terms.
3. Cash limit from credit cards is usually lower than the spending limit also when one accounts for the ATM usage charge and the fact that the interest cost starts kicking the second you make the withdrawal, traditional loan against credit card looks less attractive.
4. Most personal loan come for a minimum of 6 months period and has a substantial processing fees and early payment fine. This makes it very expensive for ultra short term loans.
5. Bank overdraft facility is the cheapest option, but unfortunately very few individuals have it.
6. Almost all other credit option require half-one day of processing time, while this is instant.
7. Earlier there used to be a local Marwari/Reddy who would double up as a pawn broker and issue loans. However lately many of them have started shutting shops and rest have become notorious of using physical violence. Hence most customers don’t want to deal with them.
8. Go for the crowdFunding and P2P loans. But most of them take a long time to close and there is always an uncertainty.

This post is written not to encourage individuals to accumulate huge personal debt but to show how ingenious unorganized sector has become. Also care must be taken to note that this activity is not legal in India. Yet these individuals advertize in newspapers and banks has not yet objected.

education News Thoughts

Study Loan Subsidy

Yesterday GoI came up with a foolhardy 4000 CR (1 billion USD) scheme of subsidizing the interest on the study loans for all Indian students.

GoI has been recently collecting educational cess on all the taxes and financial transactions. This was a welcome move, because in a country where half a billion souls have never attended schools/colleges now the Human Resources Ministry has almost infinite funds to educate the masses. Or this is what I had thought.

All the tolls collected via cess went directly to the center. While Primary education was funded by state government and panchayat/local administration (Madhya Pradesh) So in reality, although a huge war-chest was build, the spending on education hardly increased over the past 3 years.

Another problem faced by the HRD ministry was that budget was to be presented in a few months. Traditionally, any department that does not spend the funds it had been sanctioned in the previous budget is penalized in three ways:
1)It has to answer why it had not been able to plan and execute efficiently
2)The funds are taken away from it
3)In the next year, the department will get lesser funds.

I have a feeling that this scheme is nothing more than a plot to squander away our taxes.

If government wants to do something for an “All Inclusive Growth”, then open a thousand primary schools, open vocational and technical schools. The higher education is already very subsidized (a engineering graduate’s first year salary would be more than adequate to cover for his entire educational expenses).

Also if you look at the fine print, it covers only the undergraduate/post graduate study loan taken from Nationalized Banks. Now if Government wants to help the poor but deserving students, then isn’t providing a scholarship/full tuition waiver a better way to help them. After all its general knowledge that students work harder and perform better when they get study grants, for these students need to display good academic achievements for continuance of the grants.

In short there is nothing new or significant in the scheme.