You’re taking a private mortgage of Rs 2 lacs from a financial institution. Rate of interest is 10% p.a. What’s the price of the mortgage? 10% p.a., proper? Isn’t rate of interest the price of mortgage? Sure, however provided that the financial institution levies no different prices. If the financial institution does levy further prices, then the price of the mortgage will rely upon the quantum of such prices and the mortgage tenure.
That is greatest understood with the assistance of examples.
I’ve assumed that the processing payment is adjusted with the disbursed quantity. In different phrases, the financial institution disburses the Mortgage Quantity – Processing payment.
As you possibly can see, because the processing payment goes up, the efficient value of mortgage additionally goes up. It isn’t simply 10% anymore.
An attention-grabbing level right here. The influence of processing payment on the general value of mortgage goes down because the mortgage tenure goes up. Why? As a result of the identical quantum could be unfold over an extended length.
As a result of you will need to examine varied mortgage gives. The banks are good. Can trick you by providing a low price of curiosity and charging a processing payment.
Which mortgage is best?
If you happen to focus simply on the mortgage rate of interest, you’ll choose the first choice.
Nonetheless, you possibly can see that the primary choice has a decrease EMI however the next value. You pay a decrease value (regardless of the next rate of interest) within the second choice. For the reason that tenure is similar, we will additionally examine the whole payout.
The processing payment (within the 1st choice) messed all the things up.
The banks could not at all times be too upfront in regards to the processing payment on the time of utility. You may additionally deal with the rate of interest (and ignore the processing payment). You might discover out in regards to the processing payment when the financial institution lastly disburses the mortgage after adjusting for the processing payment. Even if you happen to had been to determine this out a day earlier than the mortgage disbursal, you’ve gotten already dedicated mentally and expended a lot effort and time that you do not need to get out.
It isn’t simple. Not everybody can open a spreadsheet and carry out these comparisons.
The nice half is that the RBI is conscious of those points. That banks can play good and that almost all debtors can’t calculate.
Therefore, the RBI Authorities in his Financial Coverage assertion on Feb 8, 2024, famous the next:
The Reserve Financial institution has mandated the banks to supply an all-inclusive annual proportion price (APR) to all debtors in Key Truth Assertion (KFS). Earlier, this was mandated for under the digital loans and sure different loans. Now, this has been prolonged to all retail and MSME loans.
Reproducing an excerpt from RBI’s Assertion on Developmental and Regulatory practices:
Therefore, this transfer is borrower pleasant. Nonetheless, there’s one other drawback. I’m not too positive when this Key Truth Assertion (KFS) can be issued. On the time of utility OR after mortgage sanction?
With respect to the issue in regards to the efficient value of mortgage that we mentioned, the RBI transfer is useful if the KFS is shared on the time of mortgage utility. If the KFS is shared after all of the formalities are accomplished, it doesn’t function a lot function (for the issue into account).
Therefore, it nonetheless helps if you happen to develop some consolation with Microsoft excel. A bit little bit of math does no hurt.
That is greatest understood with the assistance of examples.
| Mortgage Quantity | 200,000 | 200,000 | 200,000 | 200,000 |
| Curiosity Charge | 10.0% | 10.0% | 10.0% | 10.0% |
| Tenure (Months) | 6 | 6 | 6 | 6 |
| Processing payment | 0% | 1% | 2% | 3% |
| Processing payment (incl. GST) | – | 2,360 | 4,720 | 7,080 |
| EMI | 34,312 | 34,312 | 34,312 | 34,312 |
| Efficient Value of Mortgage | 10% | 14.1% | 18.4% | 22.7% |
I’ve assumed that the processing payment is adjusted with the disbursed quantity. In different phrases, the financial institution disburses the Mortgage Quantity – Processing payment.
As you possibly can see, because the processing payment goes up, the efficient value of mortgage additionally goes up. It isn’t simply 10% anymore.
| Mortgage Quantity | 200,000 | 200,000 | 200,000 | 200,000 | 200,000 | 200,000 | 200,000 | 200,000 |
| Curiosity Charge | 10.0% | 10.0% | 10.0% | 10.0% | 10.0% | 10.0% | 10.0% | 10.0% |
| Tenure (Months) | 12 | 12 | 18 | 18 | 36 | 36 | 60 | 60 |
| Processing payment | 1% | 2% | 1% | 2% | 1% | 2% | 1% | 2% |
| Processing payment (incl. GST) | 2360 | 4720 | 2360 | 4720 | 2360 | 4720 | 2360 | 4720 |
| EMI | 17,583 | 17,583 | 12,011 | 12,011 | 6,453 | 6,453 | 4,249 | 4,249 |
| Efficient Value of Mortgage | 12.2% | 14.5% | 11.6% | 13.1% | 10.8% | 11.6% | 10.5% | 11.0% |
An attention-grabbing level right here. The influence of processing payment on the general value of mortgage goes down because the mortgage tenure goes up. Why? As a result of the identical quantum could be unfold over an extended length.
Why Are We Moving into Arithmetic?
As a result of you will need to examine varied mortgage gives. The banks are good. Can trick you by providing a low price of curiosity and charging a processing payment.
Which mortgage is best?
- Rs 1 lac. Mortgage Tenure: 6 months. Rate of interest 9%. Processing payment of two% + GST OR
- Rs 1 lac. Mortgage Tenure: 6 months. Rate of interest: 10%. Nil processing payment.
If you happen to focus simply on the mortgage rate of interest, you’ll choose the first choice.
| Mortgage Quantity | 200,000 | 200,000 |
| Curiosity Charge | 9.0% | 10.0% |
| Tenure (Months) | 6 | 6 |
| Processing payment | 2% | 0% |
| Processing payment (incl. GST) | 4,720 | 0 |
| EMI | 34,214 | 34,312 |
| Efficient Value of Mortgage | 17.4% | 10.0% |
Nonetheless, you possibly can see that the primary choice has a decrease EMI however the next value. You pay a decrease value (regardless of the next rate of interest) within the second choice. For the reason that tenure is similar, we will additionally examine the whole payout.
- Within the first choice, you pay Rs 34,214 X 6 + Processing payment = Rs 210,002
- Within the second choice, you pay Rs 34,312 X 6 = Rs 205,873
The processing payment (within the 1st choice) messed all the things up.
The banks could not at all times be too upfront in regards to the processing payment on the time of utility. You may additionally deal with the rate of interest (and ignore the processing payment). You might discover out in regards to the processing payment when the financial institution lastly disburses the mortgage after adjusting for the processing payment. Even if you happen to had been to determine this out a day earlier than the mortgage disbursal, you’ve gotten already dedicated mentally and expended a lot effort and time that you do not need to get out.
However What if You Can’t Accomplish that A lot Math?
It isn’t simple. Not everybody can open a spreadsheet and carry out these comparisons.
The nice half is that the RBI is conscious of those points. That banks can play good and that almost all debtors can’t calculate.
Therefore, the RBI Authorities in his Financial Coverage assertion on Feb 8, 2024, famous the next:
The Reserve Financial institution has mandated the banks to supply an all-inclusive annual proportion price (APR) to all debtors in Key Truth Assertion (KFS). Earlier, this was mandated for under the digital loans and sure different loans. Now, this has been prolonged to all retail and MSME loans.
Reproducing an excerpt from RBI’s Assertion on Developmental and Regulatory practices:
Therefore, this transfer is borrower pleasant. Nonetheless, there’s one other drawback. I’m not too positive when this Key Truth Assertion (KFS) can be issued. On the time of utility OR after mortgage sanction?
With respect to the issue in regards to the efficient value of mortgage that we mentioned, the RBI transfer is useful if the KFS is shared on the time of mortgage utility. If the KFS is shared after all of the formalities are accomplished, it doesn’t function a lot function (for the issue into account).
Therefore, it nonetheless helps if you happen to develop some consolation with Microsoft excel. A bit little bit of math does no hurt.