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Are lucrative financial offers always beneficial?

Keep aside the genuine offers for a moment, and you have to steer clear of various offers that may not necessarily be good for you. Read on to understand finer points that you should consider.

Adhil Shetty

Lucrative offers for financial products abound in the market. These could be the seasonal promotional offers or those too-good-too-to-be-true deals that keep cropping up every now and then. It can be any product or service offered with an inducement to make it look irresistible.

But are these offers really “lucrative” for you? Let’s analyze a few types of offers in the financial sector to find out.

‘No Fee’ Credit Card

You may have come across advertisements for credit cards with no annual fee. However, there are no free lunches.

Most ‘no fee’ credit cards come with lesser reward points, which means, you may get lesser cash back or reward points, as compared to someone who has taken a card with fee. Also, the interest rates of no fee credit cards will likely be higher when compared to cards with fees.

Personal Loan at Low Interest Rates

Some NBFCs advertise personal loans at interest rates as low as 8-10%. Many loan takers tend to instantly apply for such schemes over phone or online without checking its terms and conditions.

The interest rates on personal loans are usually 13-25%. Anything offered below for this loan type comes with a flat rate of interest. This means, till the end of the loan tenure, you are paying interest for the loan amount taken, and not upon the actual outstanding amount, which keeps reducing. Therefore, you end up paying more than a loan offered at the usual interest rates.

Buy Home on 20% Down Payment and EMI on Possession

These schemes are offered by builders in tie-ups with banks. You need to pay only 20% of the cost of the property upfront and the remaining 80% is disbursed by the bank to the builder. The builder will pay the interest to the bank till the possession of property. After that you start paying the EMIs to the bank.

However, this offer usually comes at a price, and that is increased property rates, over and above what is charged to a customer who opts for a normal property purchase scheme. There are other risks. What if the builder defaults in paying the interest to the bank and if the project gets delayed due to any reason? Who will be ultimately liable to pay to the bank and at what cost? Therefore, think twice before snapping up such offers.

Higher Returns on Insurance

A few years back, ULIPs were sold as lucrative investment options. The bull run in the stock markets up to January 2008 made ULIP a lucrative investment plan, overshadowing its purpose as a life insurance vehicle. The fall of the markets in 2008 underlined the reality that ULIPs, if purchased, should be purchased predominantly for their insurance protection component, not so much for their ability to give returns.

Although one can expect a reasonable return of up to 6-7% per annum on traditional insurance plans, expecting a higher return is unrealistic and any such offers or promises by sellers would be misleading.

Even if an insurance product earns higher returns, the charges and costs related to the policy are enough to gnaw away at a significant chunk of your returns, as compared to other financial investments.

100% Funding for Real Estate

Sometimes, popular builders in tie-ups with banks offers 100% funding schemes on select properties. Owning a property without any down payment sounds very attractive. However, if you accept the offer without checking the actual terms of the bank, you may land yourself in an uneviable position.

In all cases, 100% funding means full funding of the construction cost. The registration, legal fees, stamp duty and other charges like charges for car parking, charges for additional facilities, etc, are excluded. So if you plan your finances assuming that you need to pay only the EMI, you will find it difficult to manage the purchase at the time of possession.

Also, such loan schemes come with stringent conditions—for instance, your FOIR (Fixed Obligations to Income Ratio) would be lower than the usual 50% as applicable to other loan takers.

‘Buy Now Pay Later’

Many retailers in tie-ups with card companies offer ‘Buy Now Pay Later’ schemes to lure buyers through EMI options, especially during festive times. It sounds lucrative too.

A credit card EMI scheme may sound attrative when you are short of cash for big purchases. However, it comes with higher interest rates and other costs, making the overall purchase costly. In case of a default, the penalty under such schemes is high. Furthermore, it will make it tough to obtain future credit as defaults affect your credit rating. Therefore, make use of such schemes only when you really need it.

Loan on Phone

Generally, a ‘Loan on phone’ offer sounds irresistible as an easy source of short term finance. Today’s lenders are ready to provide loans on just a phone call, based on your account transactions. But it is fact that the loan disbursement happens only if you clear their eligibility criteria.

If you rely on such offers for any immediate financial requirement, without checking your eligibility for the loan based on your credit score or income, you may be in for a spot of bother later. These loan offers may not offer funding at expected lower rates of interest.

To sum up, all lucrative offers are designed to catch your attention. The truth is that it may cost you more at some later point in time. It is true that not all offers are misleading—some companies might give genuine offers to promote their business, but one should read the fine prints carefully before snapping up the offer.
First Published on Feb 19, 2016 11:48 am