It's The Season For Splurging

Want to buy that home theatre system that you've always wanted? This is a good time to do so.

Festive discounts apart, a consumer durables loan can save you some money, says Haresh Soneji

Planning to buy a consumer durable this festive season, but can't afford to buy it upfront? Don't worry–here is a double bonanza.

First, you can save money from the various discounts that consumer durable companies have started to advertise. And second, selecting the right type of loan will help you save a bit extra. Here's how.

Of late, have you noticed that various private banks have started mailing you loan dockets to buy consumer durables?

Even consumer durable companies are offering loans to consumers, through arrangements with credit companies. And the best part is both these loan arrangements involve minimal paper work.

Let's check both these possibilities and find out the cheapest alternative for you.
Many private banks are offering loans to buy consumer durables at interest rates of 1.99% per month.

This compounds to 24% annual. Also, there is an initial cost element for processing the loan, which is around 1.5% of the loan amount and service.

The important thing to note here is the fact that these loans are available on reducing balance. So, effectively, you pay interest at only 15% per annum, including the processing charges.

In addition to these, service charges are applicable on processing fees and interest. Also, pre-payment of loan involves a cost element. You need to pay around 3% of the outstanding balance amount.

On the other hand, loans offered by consumer durable companies, through an arrangement with credit agencies are available at variable rates. The interest rates depend on the loan period and the arrangements with the consumer durable company.

 

So, it is quite possible that you may get annual interest rates as low as 6%, which can go up to 24%.

The important factor to note here is that several companies have an arrangement for zero per cent interest, if payments are made within months, as specified. Therefore, it is quite possible that you could get the best deal at zero per cent interest.

Various companies have different schemes running with the dealers. Check these schemes as it makes more sense to delay the payment if you are not paying any interest at the end of the day.

The processing fees while availing these types of loans is quite high at Rs 750, but can be bargained down. The other thing to note here is that you need to make four months advance payments at the time of purchase.

So, if you take a loan for 18 months, you will end up paying the entire sum in 14 months.
In an extreme case, if the interest rate charged to you is around 15% by the consumer durables company for the same number of months, it is still a better deal.

A simple calculation shows that at the end of the day you would be saving nearly 2% through this route over an 18-month period.

This is because your 18-month loan through the consumer durable company is actually only a 14-month loan. So, till the time you have the capacity of paying four month advance payments, buying through the consumer durable route is a better option.