Yes, it is important to get a few things clear at the very outset. Especially, when one is going in for any kind of loan. This is because of the high costs attached with them.
For instance, in case of home loans, there are administrative and processing costs, prepayment penalties and so on and so forth. Says financial planner Govind Pathak, "One must ask for different rates, compare them with market rates and then negotiate hard with the bank to get the best results."
Here are a few questions you need to start with.
What is my rate of interest? That is, ask for the benchmark lending rate. This benchmark rate could be linked to the bank's prime lending rate or be a mortgage specific rate like home prime lending rate. Then, ask for the spread that you will be getting.
Generally banks offer home-loan rates that are lower than the benchmark rates. As far as figures go, if the benchmark rate is say 18 per cent and your floating rate is 14 per cent, you get a spread of four per cent. Once you know this spread, you can check around in the market if this is the best spread that banks are offering.
What would be the additional costs? Banks will always impute small charges like administrative and processing fees under different heads. These charges may look small in nature but ultimately impact your overall cost of loan.
How fixed is fixed? If you are looking for a fixed rate of interest, then you need to know if this loan is fixed for the entire tenor or only, for say two or three years.
What would be the prepayment penalty? Most banks have clauses in the agreement that there will be some prepayment penalty imposed, if you pay more than a certain percentage of the loan at one go.
This is because the bank would lose interest income because of the payment. A bank may allow you to pay 25 per cent of the loan at one go and then charge two per cent, if you pay over it.
Finally, as Pathak puts it, "Constant monitoring is the key." You need to call the bank at least once in three months and find out the rates they are offering new customers. If it works out in your favour, go ahead and ask them to realign it to the present rates. Of course, it comes for a fee. But it may make sense, more often than not.
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