Tuesday, May 26, 2009


Most of us have either taken a loan sometime in the past or will be required to take one to fund our car,home, education ,personal needs etc. As a prudent borrower we all look to get the loan at the best possible rate. We all want best deal from the bank. But do you know what exactly constitutes the best deal for you? Is it the rate of interest charged on your loan? or is the mode of interest charged i.e. fixed or floating? Or is it tenure of the loan? or is it something else?
When a person takes a loan, he will most certainly look at the rate of interest charged to him on the loan . He wants a loan at the lowest possible rate of interest. This is not entirely wrong as lower the rate of interest, chances are that the deal would keep on getting better. Now , here I said "chances are" because lower rates do not necessarily mean a better deal or a cheaper loan.
How is that possible? To find out the best possible deal on your loan, you should look at the IRR (Internal Rate Of Return or effective rate of return) on your loan and not the stated rate of interest. IRR gives you the correct sense of the interest you pay on your loan. There are various other parameters in a loan which determine your actual outflow of interest .
1. Advance EMI - Advance EMIs for instance will reduce your stated interest rate but increase the IRR i.e. while it may look like a cheaper loan to you because of the lower stated rate of interest on account of paying upfront advance EMIs, you would end up paying more. When a bank takes advance EMI upfront from you, they are actually giving a loan of lesser amount ( Loan sanctioned - Advance EMI= Loan Given to you). While they give you loan of lesser value they still charge you interest on the original sanctioned amount, which increases your total outflow. Banks use this strategy very effectively to deal with customers who only look at the stated rate of interest before deciding on the loan. This strategy is also widely used in the famous "0% interest loan" for consumer durables. As a prudent customer we must understand that there is no free lunch and the 0% interest loan actually works on the principal of taking 4-5 advance EMIs upfront along with some processing fee. This helps them jack up the IRR on the loan while keeping the stated rate of interest 0. The customer is happy thinking he got a 0% loan and bank is happy because it knows it is getting its share of interest income.
2. Processing Fee - Another important factor that one needs to look at while deciding on any loan is the processing fee part. Most of the banks charge processing or admin fee to the tune of anywhere between 1% to 4% of the total loan sanctioned. The processing fee of 2-3% on home loan works out to be a decent amount. Customers tend to look at this as one time expense and do not consider this as part of the outflow. Banks at times will give a 50 basis point discount or waiver on the interest rate but might increase processing fee to make up for the revenue loss. The customer thinks he got a better deal , but sadly that is not true. Processing fee is very similar to advance EMI as here too the borrower pays an amount upfront from his loan sanctioned and his loan amount gets reduced to that extent. The bank however, will still charge him interest on the original loan sanctioned.
3. Tenure - This is another parameter which decides the overall interest fee outflow that you will have on your loan. A shorter tenure is always better for a borrower since it minimises the interest component in your loan repayment , while a longer tenure will mean you will pay more interest on your loan. Banks use tenure too to play on the mindset of the customer to have a loan with lower interest rate. They will reduce the stated rate of interest but will increase the tenure. This will most probably do more damage to you than benefit you. You need to do your IRR calculation to know the exact scenario.
Simple way of calculating the interest Outflow - Well the best and most accurate way of knowing your actual rate of interest is to find out the IRR on your loan in Microsoft excel or from a scientific calculator. But for people who want some quick bank of the envelope calculations on this, they may consider this

Your loan EMI * Tenure = Total Money paid to the bank
Total money paid to the bank - Loan amount received in hand = Total interest paid
((Total interest paid/Loan amount received in hand)/tenure) *100= flat interest rate ( this is not same as reducing rate of interest)
But, I would suggest you find out the IRR of the loan as it gives the exact picture of the effective interest that you are charged on your loan.
How should you negotiate ? Now , you know that there are 3 elements which impact your IRR or effective rate of interest ( not counting the mode of interest charged that is reducing or fixed, always opt for reducing rate on interest), you must negotiate with the bank to get any one of the 3 elements down or lower while keeping the other 2 constant. Best would be to get all 3 elements down from the banks original offer.
Banks do have some scope to offer discounts on their original rate and hence you must negotiate hard with them.


  1. Hi,

    We have just added your latest post "HOW TO NEGOTIATE LOAN INTEREST RATE WITH BANKS" to our Directory of Auto Loan . You can check the inclusion of the post here . We are delighted to invite you to submit all your future posts to the directory and get a huge base of visitors to your website.

    Warm Regards

    Au-toloan.info Team


  2. I have read this post. This post is a nice one that similar to loans in chennai , loans bazaar emi calculator chennai . That I will inform about your post to my friends and all the best for your future post..

  3. Prеtty! This ωаs an extгеmelу ωondeгful
    post. Thank you for providing thіs infοrmаtion.

    Mу ρage - fast cash advances

  4. Hey! Do you know if they make any plugins to protect against hackers?
    I'm kinda paranoid about losing everything I've worked hard on.
    Any recommendations?

    Also visit my blog; http://24-7press.com/How-To-Make-Running-For-Weight-Decline-More-Effective.htm

  5. This post will help the internet viewers for setting up new web site or even a weblog
    from start to end.

    my website Buy Trimextrin

  6. Aw, this was a very good post. Taking a few minutes and
    actual effort to create a great article… but what can I say… I put things off a lot and never manage to get nearly anything done.

    Here is my weblog :: Private Cloud Hosting

  7. Now then peeps lets just calm ԁown and have а lovely hot bath and a cup of tea.

    Look into my weblοg - long term loan for bad credit

  8. Hi, I log on to your new stuff on a regular basis. Your humoristic style is witty, keep it up!

    my page ... www.enigmapedia.com

  9. Love the end Susan!

    my web site ... Danon Bangles

  10. Ahaa, its good dialogue concerning this post here at this
    web site, I have read all
    that, so now me also commenting here.

    my web page consumer debt relief

  11. I need to to thank you for this great read!! I absolutely enjoyed every bit of
    it. I have you book marked to look at new things you post

    Visit my page ... horse stall mats for home gym

  12. Wow, this post is nice, my
    younger sister is analyzing these things, therefore I
    am going to tell her.

    my blog: cheapest car insurance compare

  13. It's very simple
    to find out any matter on web as compared to books, as I found this post at this website.

    Review my site spca car donation

  14. I have been browsing online more than 3 hours today, yet I never found any interesting article like yours.
    is pretty worth enough for me. In my view, if all site owners and bloggers made
    good content as
    you did, the web will be a lot more
    useful than ever before.

    Feel free to surf to my page ... homes for sale in ct - -

  15. love the birds and hearts necklace

    Here is my website; ,cheap nice earrings ()

  16. Hi I am so excitеd I found уour webpagе, I гeally found yоu bу accіdеnt, while Ι was
    looκing οn Digg for something else,
    Regarԁlеѕs I am here now and wοuld
    juѕt likе to say many thanks foг a inсreԁible ρost
    and a all round excіting blog (Ι alsο love the thеme/dеsіgn), I don't have time to browse it all at the moment but I have bookmarked it and also added in your RSS feeds, so when I have time I will be back to read much more, Please do keep up the superb job.

    my site; sign up for facebook email [http://www.siteratios.com]

  17. I don't even know how I ended up here, but I thought this post was great. I do not know who you are but definitely you are going to a famous blogger if you aren't already ;)

    Stop by my blog post - xerox 8560 service manual

  18. That cotton reel is only the best. So darling.

    Here is my weblog: danon jewellery online

  19. I don't know whether it's just me or if everybody else experiencing problems with
    your website. It seems like some of the written text within your content are running
    off the screen. Can someone else please comment and let me know if this is happening to them too?
    This might be a issue with my browser because I've had this happen previously. Cheers

    Visit my webpage - pilgrim jewellery bargains (bitcomet.com)