What are Bundled Loans:
- Let us take an example and explain this. Recently, HDFC Bank investigated allegations that its executives forced car loan customers to purchase a vehicle tracking device.
- It was learnt that for four years, bank executives pushed auto loan customers to buy GPS devices costing ₹18,000-19,500. The cost of the equipment was added to the loan amount.
- The Banking Regulation Act, 1949, furbids lenders from engaging in any form of business other than those referred in it. Also, the Reserve Bank of India (RBI) bars bundling of financial products.
- Despite the regulations, banks and non-banking financial companies (NBFCs) directly or indirectly bundle products, especially loans and insurance covers.
A Common Example:
- Let us suppose that Mr. Bhagwat Bele wants to open a locker. “Most banks ask such customers to open a fixed deposit (FD) first.
- If a Mr. Bele refuses, banks tell him that they don’t have lockers available”.
- In some cases, customers usually have little option but to give in to the demands of lenders, but in others there may be room to negotiate. Here are some common products that banks bundle.
HOME LOAN bundles with life insurance:
- Most lenders refuse to give a home loan if the customer does not have a life insurance policy.
- Typically, lenders ask customers to submit a copy of a life insurance policy that covers the entire loan amount but don’t force borrowers to take a policy from them.
- Also lenders, however, offer a cheaper home loan rate if the customer agrees to take a term cover from them wherein the difference could be as low as 5-10 basis points (bps) and as high as 30-40 bps.
- Also this happens as some lenders feel that a life insurance can bring down the risk slightly. In such cases, Lenders may assign specific weight to life insurance when underwriting the loans and they may offer discount if a customer buys life insurance from them. These are global best practices, and lenders don’t make a significant commission from the product.
In these cases, Lenders surely stand to gain in some situations. Typically, in such cases, the insurer takes the premiums for the whole tenure upfront; the term of the policy and the loan is usually the same. If the customer is not interested to pay the premium upfront, the lender pays it and adds the cost to the loan and earns interest. When a customer prepays the home loan, the policy ceases to exist. Here, one can find that the Lenders have a clause in the contract with the insurer, whereby the partner pays back the residual premium to the bank, and not to the customer.
Buying a separate term plan is always a better option as the policy would continue even when your loan is over. You also have the option to pay annual or even monthly premiums and take a higher sum assured.
With property insurance:
- Lenders, typically, ask borrowers to buy a property insurance when they give out a home loan. This brings down the risk for the lender which has an interest in the property. The policy covers the house in case of fire or natural calamity.
- Lenders may not force the borrower to buy it from their partner insurance company. But there’s a catch. Retail property insurance is expensive, and not many insurers offer it for the long term—over 10 years. Buying it from the lender always works out to be cheaper as it is a group insurance policy.
Bundles at NBFCS
Now let us come to NBFCS. Compared to banks, NBFCs are more aggressive in the bundling of financial products.
- Banks usually give loans to existing customers who have higher creditworthiness and clean property titles. If the borrower has a lower credit score or needs higher loan eligibility or the property title is not clear; only some NBFCs that understand the risk would be willing to lend.
- In exchange for the high risk they are willing to take, NBFCs have their own terms such as high rates and bundling of products in some cases.
- They may ask the borrower to take a traditional or unit-linked insurance plan (ULIPs) along with home loans. These policies have a high commission structure, which could lead to poor returns.
- Further, some have introduced products such as a financial fitness report, which the customer must compulsorily take before processing the loan. The charges are as high as ₹4,999 for such value-added services.
- Accidental insurance is another product that NBFCs bundle with different loans.
- For unsecured loans, NBFCs mandatorily ask borrowers to take a credit or loan shield insurance from their partners. In this product, the insurer repays the loan in case the borrower dies or is unable to repay due to a health emergency or disability. It’s not an expensive product and there are limited alternatives available in the retail market. However, buying a term insurance plan is a better alternative for all your liabilities.
What the Customer should do?
ASSESS BEFORE YOU APPLY
- If a borrower has high creditworthiness (high salary, high credit score, no existing loan and so on), top banks would be willing to negotiate a few things. But if that’s not the case or the property title has some problems, then the borrower can do a few things to get a better deal.
- A borrower should not apply with multiple lenders at the same time. Multiple enquiries get reflected in the credit report, and it makes the borrower look credit hungry. It also lowers the credit score. A better option is to shop for a loan on an online marketplace. Such platforms pull your credit report and suggest the possible lenders which would be willing to finance your loan, show the rates they offer and indicate about the possible bundling of products.
- Ensure to do a cost-benefit analysis by adding up the total loan outgo, processing fees, and the cost for life and property insurance.
- When the lender tells you that taking a product with another is mandatory, ask if that’s mentioned in any official document. If not, there may be scope for negotiation.