During this festival season, many of the banks are coming up with lucrative home loan offers to attract home loan borrowers. Offerings include options like a lower interest rate, processing fee waiver, cash back or EMI waiver options. Remember that a home loan is a long term commitment. So before finalizing any home loan scheme, pay attentions to some basic facts. In this article we will take a look at the use case to help you choose between zero processing fees and lower interest rate. In the next article we will take a look at other options like cash back and EMI waiver.
The processing fee is a one time expenditure. It is used by bank to complete loan processing formalities and it is non refundable. Generally it is in the range of 0.25% to 0.50% of the loan amount. Few banks are even offering zero processing fee to lure customers. Given the option between lower interest rate and zero processing fee, it is advisable to go for lower interest rate in most cases. Let’s take a look at following illustration.
Bank A offering a 10.5% interest rate with 0% processing fee and Bank B is offering a 10.4% interest rate with 0.5% processing fee.
| Bank A | Bank B | |
|---|---|---|
|
Loan Amount
|
40,00,000 | 40,00,000 |
|
Interest Rate (%)
|
10.5
|
10.4
|
|
Processing Fees (%)
|
0
|
0.5
|
|
Tenure (months)
|
240 | 240 |
|
EMI
|
39,935
|
39,667
|
|
Interest Payment
|
55,84,446
|
55,20,047
|
|
Total Payment
|
95,84,446
|
95,40,047
|
|
Saving in total Payment
|
44,399
|
|
Even though Bank A is offering 0% processing fee, in long term taking a loan from Bank B is beneficial due to slightly lower interest rate.
So if you are in a dilemma about choosing between lower processing fee and lower interest rate, reuse our Loan Transfer Calculator as shown below. The illustration below shows how to get the savings amount for the values shown in the above table. Know your savings by entering values on the same lines.
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