Attractive interest rates, fee waivers: What to watch for in festive loan offers

Diwali is considered one of the most auspicious times for big-ticket purchases, whether it is buying a home or a vehicle. To tap into this festive sentiment, banks are rolling out loan offers, such as interest-rate concessions and processing-fee waivers.

These discounts may appeal more given that the Reserve Bank of India (RBI) increased the repo rate by 25 basis points on 7 October and is now moving towards recalibrated tightening.

Santosh Agarwal, chief executive of consumer credit and financial services marketplace Paisabazaar, said that lenders have traditionally focused on making offers more attractive during the festive season by offering lower interest rates for a limited period or waiver of processing fees.

But, given the broad macro factors, including the rate hike, festive discounts need closer scrutiny, as this year they may not make loans as lucrative as earlier. Mint looks at some of the offers:

Home loans

For new homebuyers, Jagadeesh Mohan, co-founder of EMI Saver, said banks offer festive concessions to meet loan volume and profitability targets, while developers time launches to coincide with the auspicious homebuying season.

Most home loans in India carry floating interest rates linked to an external benchmark, such as RBI’s repo rate. The lending rate comprises the benchmark rate, a spread that usually remains fixed for a period, and any borrower-specific concessions based on their credit profile.

Mohan said that, of the 25-basis-point rate hike, most banks have absorbed only 5-10bps as part of their festive campaigns through a combination of spread compression and enhanced borrower concessions, meaning their effective lending rates for new customers have risen by only 20bps.

For example, Bank of Baroda had increased the rate after the RBI repo rate hike announcement, but has now lowered it by 5bps effective 10 October, Mangesh Zope, founder of Peaceful Loans, said.

The bank said, in response to Mint's emailed questions, that as part of its festive campaign, its home-loan interest rates start from 7.40% per annum, with quick sanctions and a complete waiver of processing fees until 31 October. It also offers an additional interest-rate discount of 5bps to women and 10bps to certain other eligible borrowers, including people under 40, employees who receive their salaries through BoB accounts, and qualifying high-net-worth individuals and Baroda Radiance customers.

State Bank of India (SBI) and IDBI Bank are also advertising concessional rates, but, according to experts, these are reserved for borrowers with excellent credit scores of 800 and above. Banks follow risk-based pricing, so the final rate can depend on your credit profile and other factors, including your employer or your relationship with the bank.

While short-term discount windows can help lock in a lower spread, various banks’ terms state that the spread is subject to change at the bank’s discretion or if the borrower’s credit profile deteriorates. Also, check whether concessions depend on signing up for add-ons like property insurance, and whether you really need them.

Pankaj Mathpal, founder and managing director of Optima Money, said while borrowers should take advantage of the offers, they should not take a loan simply because concessions are there.

He added that borrowers should assess their long-term repayment capacity rather than relying on the loan amount or EMI a bank says they are eligible for, and consider other charges associated with the loan.

Processing fee waivers

And it’s not just a discount on the interest rates, some banks are also advertising waivers or discounts on processing fees that cover the bank's internal costs to verify your profile and approve the loan and typically range from 0.25% to 2% of the total loan amount (plus 18% goods and services tax), though some lenders cap it at a fixed minimum or maximum amount.

Zope said that in an affordable housing loan, a processing fee waiver is meaningful as a festive offer, but big-ticket home-loan borrowers actively seek banks that will refund the processing fee fully or partially, or agents who offer cashback on processing fees regardless of the festive season.

A loan offer with a processing fee waiver can reduce the initial expense, but another with even a slightly lower interest rate can cost you less over the long term, Agarwal said, adding that borrowers should compare multiple options on all parameters, including the APR (annual percentage rate) or the total yearly cost.

Vehicle and personal loans

Vehicle and personal loans are also advertised at attractive rates. For example, HDFC Festive Treats advertises a lower starting rate of 8.25% for car loans and 9.99% for personal loans, compared to the10.5% it usually offers. SBI is also advertising concessional rates for car loans. The bank’s car loans start from 8.45% and personal loans 10%, according to PaisaBazaar as of 21 October.

Sumit Singla, CEO of Rupyy, said car loans at public sector banks still start at about 7.3-7.5%, and this festive season, the best savings are in fees, with offers that include 50-100% off processing fees, no foreclosure charges on some car loans, and longer loan tenures.

HDFC Bank is offering a tenure of up to 8 years and zero foreclosure charges on car loans, but its terms state that the advertised interest rate for new borrowers is subject to change without prior notice, and the zero foreclosure charge is applicable only after 24 months, with no EMI bounce. Kotak Mahindra is offering up to a 50% waiver of the processing fee, and Indian Bank is offering nil processing fees. Singla said there is no need to rush, according to fintech BankBazaar. “Many offers run until the end of December, which gives you time to compare," he added.

According to Singla, most borrowers pay 0.5-1% more than the advertised rate, and for riskier personal loans, the total cost, including fees, can be more than double the advertised rate. For used cars, the car's age also determines the interest rate.

Singla explained that, on a ₹5 lakh car loan for five years, the EMI can differ by about ₹1,600 a month between lenders, almost ₹1 lakh over the full loan.

It may also be beneficial for a borrower to consider no-cost EMIs offered on e-commerce websites, rather than a personal loan, to fund consumer durables and other festive purchases, which allow buyers to spread payments over a fixed period without incurring interest.

However, Agarwal said that in some cases, the product’s upfront price may differ from what is charged without the no-cost EMI offer, and comparing the final price and the total amount payable under both scenarios can help you make a better decision.

Credit card companies and lenders also levy a processing fee ranging from ₹99 to ₹500 or 1% to 3% of the transaction value, plus a mandatory 18% GST on both the processing fee and the built-in interest component.

Borrower checklist

Before signing up for a loan based on a festive offer, borrowers should check their credit score, obtain quotes from at least two to three lenders and compare the APR in the key facts statement, rather than focusing only on the advertised interest rate. They should also verify whether the loan carries a fixed or floating rate, understand foreclosure and prepayment charges, calculate the total repayment over the loan tenure rather than comparing EMIs alone, and decline add-on products that are unnecessary. For vehicle purchases, it is important to ask for the cash-discount price and compare it with the financing offer, said Singla.

Festive loan offers can help borrowers save on upfront costs and, in some cases, interest payments. However, the real benefit depends on the borrower's credit profile, the lender's eligibility criteria and the charges that remain applicable despite the advertised concessions. Borrowers should compare the total cost of borrowing before making a decision.