for preventing ourselves from falling prey to deceptive interest
The first and the foremost factor that comes to our
mind while availing for Home
Loans is the interest rate that is levied on the home loans.
While comparing the different schemes of various lenders we
are most likely to consider the home loan proposal that gives
us the best and most competitive rate of interest.
in spite of two lending institutions offering us a loan at an
identical rate of interest, in all likelihood the cost of our
loan may greatly differ between both these lenders depending
on the rate of interest and the methods used by them. Also,
if one lender is offering an interest rate lower lower than
the other, it need not necessarily mean that the lower interest
rate loan is a cheaper option. Apart from the rate of interest
we also need to know the method of calculating interest adopted
by the lenders, which plays an important part in justifying
the profits of the lender and the loss incurred by the loan
* EMIS (Equated Monthly Installments)
repayment of the principal and the interest on the home loans is undertaken through EMIs i.e. Equated
Monthly Installments. Besides the rate of interest, the value
of the interest component of EMI largely depends on the method
used by the loan lender for calculating or computing the interest.
* Reducing Balance Method
usually adopt the reducing balance method for ascertaining
the interest payable on loans. Herein, the interest is levied
on the principal amount outstanding on the loan at a given
point of time. Since the principal amount of the loan reduces
as and when repayment on the loan is undertaken , the interest
amounts also lowers, since it is charged as a percentage of
the reduced principal amount. The frequency of computing the
interest using this reducing balance method is important. Interest
can be computed on reducing balance on a monthly, quarterly,
half-year; or on an annual basis.
* Monthly, Quaterly, Half -Yearly And Annual Rests
Under a monthly rest
system, the monthly principal position that we pay on our
EMIs gets deducted when calculating the interest rate for the
subsequent month. The principal is reduced 12 times in a year
and the interest is charged only for the outstanding principal
amount on a monthly basis. Similarly under quarterly, half yearly
and annual rest methods, the principal amount is deducted after
every 3, 6 and 12 months respectively.
* Reasons why monthly reducing is more preferable than quarterly,
half-yearly and annual:
greater the frequency of computation or calculation of interest,
the lower the effective interest cost we have to bear. For instance,
if we take a home loan of Rs.15 lakh for a 20 year tenure at
a floating interest rate of 8 (purely an assumption made to
understand the methods used) percent per annums, the EMIs
applicable will be Rs.12,547, Rs.12,580, Rs.12,732 under the
monthly, quarterly half yearly and annual rest methods, respectively.
The difference between the EMI amount under the monthly and
annual rest methods works out to be Rs.185, which translates
into a significant difference of approximately Rs.44,400 over
the entire 20 -year tenure of the loan. This example shows that
Equated Monthly installment is the lowest when the interest
is calculated by the monthly reducing method.
*Beware of the fox minded loan lenders on the prowl
Nowadays, a few lenders
have been following a certain method while calculating interest
on home loans, i.e. the annual reducing method which indirectly
is a loss to the loan payers and a fruiting benefit for the
lenders. This has forced borrowers to bear a higher repayment
burden. Although lenders declare the method used in the loan
agreement, these disclosures fail to make a borrower aware of
the implications of the other interest calculation methods to
understand which method is most suited for him.
* Monopolies and restrictive trade practices commision(MRTPC):
CRACKING THE WHIP
However, this unfair trade practice has now come under the
scanner recently, with the Monopolies and Restrictive Trade
Practices commission (MRTPC) issuing an order against a leading
home lender for following the annual rest method wherein a monthly
rest is more justified. Due to lack of adequate information
and poor level of transparency involved in explaining the terms
of an annual rest the MRTPC has asked the concerned lender to
do away with the annual rest system of charging interest. If
the Supreme Court rules in favor of MRTPC, home loan consumers
* Be alert and careful before signing a deal
avoid getting caught by your neck from the money lenders dont
blindly just trust the lender. Read your home loans agreement cautiously and determine the
mode of interest levied on your loan so that you save yourself
from an inflated cost on it.
Keeping the above things
in mind you can ready to be well protected from the various
deceptive methods which you may be unknowingly falling prey
At the end some major points to be kept in mind while availing
for any home loan scheme from any money lender by understanding
the methods adopted by them for computing interest and to select
the most appropriate one for you:
*The effective financing cost on your home loans depends on the interest rate and the
way it is calculated.
*The reducing balance system of charging interest is often
followed by lenders. So have proper information regarding it.
* This method can be further broken down into monthly, quarterly,
half -yearly and annual reducing system. Preferring monthly
reducing system above quarterly, half yearly and annually would
be a better aspect.
*Interest outgo is highest under the annual reducing method
and lowest under the unfair trade practice of following annual
*Read your home loan agreement cautiously and determine the
mode of interest levied on your loan by the money lender.
*Beware of the deceptive trade practice used by the money lender.
1. home loan
In simple terms pre-approved bad credit home loans are home loans sanctioned to poor credit holders, on the basi...
2. loans compare
In an ideal scenario, it's usually a good idea to take a little time to compare loan offers before you decide on...
3. hard money loans
Theoretically speaking a hard money loan means funding a potentially viable project for which financing may not ...