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How To Negotiate Loan Rates?

April 29th, 2011 by
  • Whether it is haggling from a neighborhood shop or buying stuff in a branded store, we all love to negotiate. We put our negotiating skills on work to make the best of our hard-earned money and give us an instant high. So, why not do the same while buying pivotal personal finance products such as loans; which have lasting impact on our lives? However, bargaining for a personal finance product is not as easy as bargaining on groceries; you need to learn the tricks of the trade. Here are few useful tips that you can use for negotiating interest rates on your home and personal loans…

    Update yourself

    The first step in this ladder is to update yourself with what’s happening around you. Talk to various lenders/agents beforehand and take an intelligent guess about your loan eligibility based on collected information. Here, you have to decide on the relevant issues such as type of interest rate tenure, other charges etc., and note everything on paper. If you know what you are talking about, more often than not, you will be taken seriously.

    Here, your homework will also come handy in understanding the market lingo used often to mislead borrowers. For instance, banks often lure customers with so called ‘flat rates’ on personal loans, which are never flat in its literal meaning as you generally pay interest on reducing balance method; wherein with every EMI, principal amount of the loan keeps coming down. Here, they play on the ignorance of customers, which you will eliminate with your knowledge to get a best deal.

    Use intermediate to make banks vulnerable

    Allow banks to earn your loan application by using a broker in between, so that banks have to make an effort to make you their customer. Shortlist few banks/lenders and approach them through certified brokers or agents. Brokers generally locate various lenders and allow them to talk terms including interest charges and fees. A lender will particularly be vulnerable, if it knows that there are several other lenders as well, who are also considering your application. In such a case, you will have more chances to negotiate for lower charges. Involving broker means a brokerage expense, but it’s worth it, when you are approaching a sizable number of banks/lenders. Also, you could benefit from broker’s existing relationships with banks.

    Leverage your credit score

    Today, every bank looks at borrowers past credit history before sanctioning any type of loan. If your current credit rating is sound, it puts you in driver’s seat straight-away in negotiating on loan interest rate, processing fees, pre-payment penalty and other charges. It’s because with sound credit rating, banks sees more chances of repayment of their dues and reduce chances of NPAs. Again, do negotiate with at least 3-4 banks, with the help of brokers.

    Once you are done with that phase, it is important to get all commitments in writing. Further discounts on processing fees and prepayment penalties are also possible, especially if you are approaching a bank with which you have a salary account or are using their credit card. Your consistent employment history, long relations with a particular bank, high upfront payment work in your favor while negotiating for a best deal.

    You can set things right, even in an adverse case. Loan decisions are usually not taken overnight, especially in case of home loans, if you are not desperate to get one and can afford few months to improve your credit score before applying for a personal/home loan. Usually 3-6 months are sufficient enough for banks to form an opinion for personal loan. You can improve your credit scores by adopting the following measures:

    • Making payments, whenever due, without any delay
    • Not changing jobs in the interim
    • Not utilizing maximum limit on your credit card
    • Not applying for loans frequently
    • If already a defaulter in CIBIL records, pay-off debt and get your name removed

    Banks tend to appreciate such efforts by buyers and allow them home loans on low interest rates.

    Efficient Paperwork

    Availing an efficient loan is almost like convincing a bank how easily verifiable your income and repayment capacities are. So, being ready with pertinent documents is a must. You must clearly state details of your existing debts, if any (including credit cards), and repayment history to all lenders. Note that banks will check the same with Credit Bureau anyways, to find out about your existing financial position. So, making complete disclosure about your existing borrowings makes sense and can actually be used to negotiate further. The document filing is also an important step in this process as it is highly unlikely for a bank/lender to offer you best possible quote until the documents are submitted. In other words, it would not be wrong to say that fully disclosing your actual financial position will give you more chances of securing lower interest rates.

    In case of home loans, it is advisable for you to identify a property before approaching lenders as this provides them with a sense of surety that transaction will happen in a short period of time, rather than getting delayed as in case of ‘pre-approved loans’. It is a natural tendency amongst banks/lenders to reserve their best rates for immediate disbursement cases. Hence, this this would get you rewarded with less interest burden.

    Time your loan

    Time permitting is a tactic of carefully timing your loans at month-end or quarter-end. This is simple because every lending bank has pre-defined sales targets for its staff, which are generally month/ quarter ending. There is a possibility that to complete their targets, banks will offer better rates.

    Negotiation tactics is more useful in case of home loans as here you get to negotiate with builders as well. All reputed builders such as DLF, Unitech etc., are looking to clear their inventories and book maximum possible sales by quarter-end in prevailing scenario, wherein retail housing sector is grappling with tepid demands from end-users. This compels developers to offer discounts (with negotiating power to buyers) to clear their unsold inventory.

    Beside this, on several festive occasions, such as Navaratra, Diwali, etc., banks tends to be lenient to encourage more sales. If your loan requirement is around the same time, you can press banks to shell more incentives in terms of reduced interest rates or other charges.

    Bigger is better

    If possible, bundle your loan request with some of your friends & relatives, thus offering a larger business opportunity to banks, and hence making your case stronger for negotiation. For instances, if four persons living in a same residential building jointly apply, banks may be able to provide additional discounts in interest rates as banks would be saving on their legal and technical costs relating to property title, valuations, etc.

    Interest Rates Comparison:

    Find out best interest rates on offer, in home loan and personal loan segments…

    Home Loan

    Bank Name Interest Rate
    Axis Bank 9.25%
    India Bulls 9.75%
    HDFC Bank 10.0%
    ICICI Bank 10.0%
    IDBI Bank 10.5%

     

    Personal Loan

    Bank Name Interest Rate
    Barclays Bank 14.0-21.0%
    Citibank 15.0-20.0%
    HDFC Bank 15.5-22.0%
    SBI 16.75%
    Bank of Baroda 16%

    Source: Rupeetalk.com

    Basics to negotiate

    · There is nothing like Standard Rates for banks. Banks might charge different interest rates for employees within the same company with similar employee profiles, based on negotiation.

    · Banks encourage early disbursements. So be ready with documents/property etc before approaching them

    · Banks prioritize borrowers with sound credit scores. If you are amongst them, you automatically stand to gain a better deal.

    · It’s not all always about interest rates. Negotiation on other things e.g. Duration of fixed interest rates may benefit you in the long term

    · Banks have different band of rates for different categories of borrowers e.g. Doctors, Lawyers, Salaried class etc. Know your band interest rates.

    · Do a thorough check on T&C for any hidden charges & clause. Negotiate to customize T&C as per your requirements. E.g. with lending rates expected to stabilize in the near future it make senses to negotiate a shorter duration of fixed interest rates.

    · Get all commitments from various lenders in written

    · Be sure of your eligibility well in advance

     

     

    Published on April 29, 2011 · Filed under: Home Loan Articles;
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