Yet Another Marketing Manoeuvre (YAMM)

Financial Institution offering loans with repayment option through Earnest Monthly Installment uses this gimmick to lure customer. Lemme narrate my own experience with personal loan from leading financial institution in India. I was logging enquiry calls for personal loan with different banks and most of them stated interest rate around 21-23% per annum, and they are ready to negotiate on the interest rate based on personal profile and company I am working for. When I enquired with this bank, they claimed 12.3% as interest rate. Wow, cool, I thought I landed in good deal. Got ready for all proceedings and while coming to EMI calculation, I landed in different numbers than those quoted by those sales guys. Got into inquisitive mode, while enquiring further found that compound Interest rate is only 22% as in any other bank, but the 12.3% they claim is a magic number. It works out like this

 

Principal Loan Amount	100,000.00
Interest rate(p.a)	22.00
Interest rate(p.m)	1.83
Tenure (months)	12.00
EMI	9,359.44
EMI * Tenure = Total Repayment	112,313.26
Effective Interest Rate	12.31

Assume I loaned 100,000 from the bank. With 22% compound interest rate, my EMI works out to be 9360. With that EMI, I will be paying 112,313 at the end of the year. Which these guys taken as base for to calculate effective loan amount and effective interest rate works out to be 12.3%. The terminology is made to sound flawless, 12.3% is called flat interest rate and 22% is called interest rate on reducing balance.

Looks like perfect bait to attract customers. Isn't it? There is one basic flaw in the argument with flat interest rate. The 22% interest rate seems to come down to 12.3% because I am repaying the part of principal and interest every month. This is an apparent illusion with the compound interest rate maths. Suppose if I  don't pay the EMI and am willing to pay the final amount at the end of the year, Will the bank accept this offer? No and they can never.

 

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