Moneycontrol News
You often get calls offering you loans at attractive interests. Some offer you a flat rate of 8 percent for three years and some offer 1.5 percent monthly interest rate. During the festive season in particular, some of us end up overusing our credit cards and such calls seem to provide an escape route. Compared to the 3 percent per month payable on credit cards, these deals may sound like music to the ears. But choosing the right deal is the real issue. Let’s look into the details.
The old wisdom asks us to opt for a like-to-like comparison. All deals must be assessed in the light of effective rate of interest per year. Most home loan offers are expressed this way. So you are not asking the banker for something unheard of. Here is how it works.
Monthly interest rate offers
When you hear the monthly rate of interest you tend to get attracted to it. The biggest hook here is the comparison with the rate of interest payable on credit card. If you have accumulated a good balance on your plastic, then your point of reference is steep 3 percent rate of interest per month. However, do not fall into that mental trap. Do not be a victim of anchoring bias, as they call it in behavioural finance.
When you are out in the market to borrow you need not pay the highest rate of interest. The caller, though, may want to quickly close the sell by offering a ‘small' 1.5 percent rate per month –or half of the 3 percent you would otherwise pay. Do not jump the gun.
“The deal offered by the credit card issuing company need not be the best option. Ask for the interest rate to be expressed in the effective rate of interest per year,” says Anil Rego, founder of Right Horizons. Rate of interest of 1.5 percent per month amounts to 19.56 percent per year. Personal loans are nowadays available at as low as 12 percent.
If you are employed with a blue chip company and have a good credit score then there is a fair chance that you will get better deal in the market. You can also look at a top-up loan just in case the amount is too big and you already have a home loan running.
Flat rate or monthly rate? Fine print is key to identifying the best loan deal
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