20 yr loans - Banks love it !
Came across this interesting portal http://www.apnaloan.com, a fine repository for all information pertaining to loans in India.
They have a simple EMI calculator in their site. My curiosity pushed me to key-in some values and gather some data. Boy! Its really interesting.
Say you are going for a home-loan. Its a __practice__ to go for a 20 year loan. Why?
- Probably every Tom, Dick and Harry you know has been going for the same.
- Is it the bank that thinks its the best suited loan for you (Oh! How caring ?).
Well, I think the tendency to go for a 20 year loan is also to do with the fact people tend to think that the monthly EMI is __manageable__ only if the term is that long. Hmm, but did you care to calculate ?
In the following table I have computed EMIs using the prevailing 12% interest rate for home loans.
| Loan Amount | EMI if (Period=15 yrs) | EMI if (Period=20 yrs) | Potential Saving |
| 20,00,000 | 24,003 | 22,022 | (22022*240 - 24003*180) = 9,64,740 |
| 40,00,000 | 48,007 | 44,044 | (44044*240) - 48007*180) = 19,29,300 |
The saving one can make by sensible thinking is close to 48.24% of the principal.
For people (note: individuals who have been evaluated to be capable of taking such loans) who believe that paying 2000 or 4000 more per month would mean a compromise in lifestyle: God bless!
6 comments:
Rajesh,
But you also need to adjust this for inflation. For example, for a guy starting a job, the 2K-4K per month may make a difference. And after 20 years the 9 lakhs, adjusted for inflation over those 20 years amounts to practically nothing.
The other portion I urge people to pay close attention to is the pre-payment penalty some banks have. Someday if you make more money you can pay off the loan faster but at what cost?
No Sir! I tend to disagree. There are norms on loan eligibility. A fellow for whom 2000 or 4000 can cause a crisis will not be __legally__ eligible for such a loan, at the first place.
Ok, we can even look at it another way. Say, a person has touched his best possible limit. Understand that there are pay hikes blah blah coming his way over the years but the EMI is going to remain fixed. So, crisis will at most last for a year.
And yes, I agree to your point on inflation. I didn't deliberately consider it, since I'm not even considering the growing salaries, which grows at much much higher rate than inflation.
Rajesh,
your point about saving 9 lakh is surely valid. But in the twenty years, you will come across many times when you need cash for many other
Purposes. Say u find an opportunity for a site, or some other investment opportunity, some unexpected expenses like a trip. Along with the loan you need to balance your cash also .. right.
Hence you always need to keep the EMI to be a percentage of the salary not too high not too low.
Tsrd,
Fair. I understand what you are trying to say. But, let me reiterate, a person who thinks an additional 2000 can put him/her into a crunch should not be applying for such a loan in the first place.
I really think those 5 years are a big deal. Looking at the increasing uncertainties, I think people leave their beloved ones in a very vulnerable position by going for such long term loans. What if something happens to him/her ? Imagine the liability over the family.
I hope all these smart people have insurance policies (term insurance please...not some stupid ULIP) at least 10x their annual pay.
I had a recent experience with some home loans which I will post for the benefit of others. I was talking to this guy from HSBC bank who was trying to offer me a loan. He was trying constantly to push a 20-year loan to me even though I was telling him that I was looking at a 10 or 15 year loan. I made him put in the numbers into a tool and the results were as follows:
If your loan amount is x; at 12.25% interest you end up paying:
Term Amount repayed
---- ---------------
10 years 2x
15 years 2.5x
20 years 3x
you can see why the banks are pushing for this loan. I put the guy on the spot saying why I should pay the bank 2x the cost of the loan as interest. He had no answer except to say something about the lower EMI.
Thanks Aswin. Its good to see a testimonial on my theory. That should help me convince my brethren better.
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