Recently my friend received a call from ICICI Bank offering personal loan at 7.2% flat rate of interest per annum. Fortunately my friend was moneywise and he immediately understood the hidden meaning of a flat interest rate and turned down the offer.
In India, there has been a sudden spurt in reputed banks offering personal loans at Flat Interest rates. To the innocent consumer they offer an interest rate of 7% per annum at fixed interest rate. Since the borrower finds that this offer is much less than the ones offered by Housing Finance Company and he realizes that personal loans are riskier for the banks than Home loans, he gets duped to think that he is being favoured by this bank. While in reality since he will be returning the loan in equated monthly installments, he is actually paying almost twice the interest rate to the bank, on reducing basis.
To quote from "The Language of Money" by Edna Carew,
Flat Interest rate is the Interest charged on the full amount of a loan throughout its entire term and commonly known as a 'pre-determined' credit charge. The flat rate takes no account of the fact that periodic repayments, which include both interest and principal, gradually reduce the amount owed. Consequently the effective interest rate is considerably higher than the nominal flat rate initially quoted.
Anyone confronted with a flat rate of interest should remember: a rough rule is that 9 per cent flat equates to about 17 per cent effective per annum, ie, double the flat rate less one per cent, although this varies with the term of the loan.
So the next time when you get a call from a bank offering a personal loan at a low flat interest rate just remember it is a sales gimmick to hide the extraordinarily high rate of interest that will be charged to you. I consider this initiative to be just an unethical practice to fool and lure borrowers.
In India, there has been a sudden spurt in reputed banks offering personal loans at Flat Interest rates. To the innocent consumer they offer an interest rate of 7% per annum at fixed interest rate. Since the borrower finds that this offer is much less than the ones offered by Housing Finance Company and he realizes that personal loans are riskier for the banks than Home loans, he gets duped to think that he is being favoured by this bank. While in reality since he will be returning the loan in equated monthly installments, he is actually paying almost twice the interest rate to the bank, on reducing basis.
To quote from "The Language of Money" by Edna Carew,
Flat Interest rate is the Interest charged on the full amount of a loan throughout its entire term and commonly known as a 'pre-determined' credit charge. The flat rate takes no account of the fact that periodic repayments, which include both interest and principal, gradually reduce the amount owed. Consequently the effective interest rate is considerably higher than the nominal flat rate initially quoted.
Anyone confronted with a flat rate of interest should remember: a rough rule is that 9 per cent flat equates to about 17 per cent effective per annum, ie, double the flat rate less one per cent, although this varies with the term of the loan.
So the next time when you get a call from a bank offering a personal loan at a low flat interest rate just remember it is a sales gimmick to hide the extraordinarily high rate of interest that will be charged to you. I consider this initiative to be just an unethical practice to fool and lure borrowers.
3 comments:
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Very informative, I just stumbled on this blog through another link. Will spread the word out as I can see the calls pouring in with similar offer to many folks.
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