Of hidden charges and fine print

There is clear consensus among experts that whether the market goes up or down, there will be a serious element of volatility in the days to come.

Nowhere is the Latin term 'caveat emptor' which means 'let the buyer beware' more applicable than in the financial industry. The number of hidden charges and fine print could leave the customer feeling totally dizzy. Here's a look at all these products and how you can minimise these costs.

Credit cards

They are the most expensive products in terms of costs. The interest rate is as high as 2.95 per cent per month. Multiply this interest rate over 12 months and we have 35.4 per cent per year.

Of course, they offer you the option of paying only 5 per cent of the outstanding balance as minimum payment per month. But the cost of rolling over is over 41 per cent.

What should you do? Do not fall for the minimum payment trap. Pay the entire outstanding amount on the card in the same credit period without carrying it forward. Better still, use cash or debit card.

In recent times, credit card companies are offering zero interest expenditure. Here, you pay the entire amount through equated monthly instalments. But the old adage of 'There is no free lunch' holds true here. The dealer does not care if you buy his product cash down or through EMIs.

If you were to buy in cash, he gives you the discount, while if you buy through such a scheme, the discount is passed on to the financier giving you the loan. In effect, this discount is nothing but the interest the financier or the credit card company would have otherwise charged you.

What should you do? If you are purchasing any white goods through such a scheme, ask for the cash discount price of the product. You will immediately realise the cost of buying through the card.

Home loans

No doubt home loans are one of the better forms of loans in the market but they also come with a lot of fine print.

Fixed may not be really fixed: Most banks actually hike the rate over the years.  There is a clause in the loan document that says that the bank can revise its rate after three or five years. And in a rising interest regime, it might happen more often.

Exit options or pre-payment clause: Like most other loans, home loans are not easy to exit. Most lenders allow a certain percentage of the home loan (usually 25 per cent) to be pre-paid without any penalty.

Anything more than that and the bank imposes a prepayment penalty of approximately 1.5-2 per cent. Given the high value of home loans, the penalty amount could be quite a bit.

This charge also makes it difficult for customers to transfer the loan from one bank to another, which is offering a better rate of interest. For instance, a bank, in its effort to corner market share, offered variable loans at 6.75 per cent per year.

The additional carrot was a rate lock-in for two years. After two years, the bank went for a large number of hikes. Today, its floating rate stands at 13.5 per cent, when the average market rates are hovering at around 11.25-12 per cent. Even the existing customers are stuck at about 13 per cent. And then there is an exit cost of 2 per cent.

Higher EMI or tenure: Here again, as the rates go up, the banks increase your loan repayment period (subject to a limit) rather than increasing your EMIs. Often you get to know of it at a later date. But you should remember that longer tenure means more interest income for the bank.

What should you do? Adjust EMI not tenure. In a rising interest regime, go for a hike in EMI instead of a rise in tenure. This would help you to reduce interest payout. Also, if you are prepaying some part of the loan, first pre-pay then adjust the rate.

This is because once you have prepaid some part, your outstanding principal will automatically come down thereby, the overall interest cost. Moreover, try and readjust your loan rate with the existing market conditions. This will help you to reduce costs.

Cost-Cutting

Credit card:

• Compare zero cost financing from companies to cash discount price of the product
• Pay the entire outstanding or as much possible, instead of paying minimum amount

Home loans:

• Adjust your interest rates with the prevailing rate in the market
• Home loans: Prepay the loan amount first and then adjust the interest rate