Tuesday, December 26, 2006


Most people reading this article would have at some point in their lives taken a loan. Some would have had a good experience with the lender, be it a nationalized bank, private bank or the unorganized sector. And some would have had a pretty bad experience as well. Whichever the case, the odds and conditions for the loan would have been stacked against you.

My reason for writing this is not to discuss the one-sided conditions that are presented to the debtor (that will fill a whole book on the subject), but to inform the general public of a scam that has been going on right under our nose, under the “watchful” eye of the RBI and yet no one seems to notice it. And those who do (like brokers, dealers etc) turn a blind eye so that they can meet their numbers month on end. The scam of ADVANCE EMI (Equated Monthly Instalments) on loan from private banks.

I too have taken loans – educational loans, home loans, vehicular loans etc. Luckily the loans I took except my vehicle loan were from nationalized banks. Even though the service and speed at the nationalized banks is poor, debtors can heave a sigh of relief and rest assured that that will not be unduly tormented and robbed off their hard earned money.

But sadly I chose a private bank for my vehicle loan. At the time of taking the loan, I was not aware of the scam, nor did it cross my mind. I was one among the 1000s of unsuspecting masses eager to buy my first bike out of the salary from my first job. It was a proud moment it was and the sales man at the dealership breezed me through the formalities. I signed some papers, got the loan approved, gave my advance EMIs and cheque leaves for the rest of the EMIs and in 3 days time I had my lovely new bike. Then I embarked on the arduous task of repayment living on a hand to mouth existence.

So what’s wrong with advance EMI you ask?

As a case study, let’s assume you need to take Rs 1100 loan @ 10% pa which you will be paying off in 12 EMIs

Interest on Rs 1100 @ 10 % in a yr (12 EMIs) = Rs 110. (For simplicity’s sake lets say the interest is Rs 100.) (I know that EMI calculation is not as simple as this, but this is just a case point)

If One month Advance EMI (AEMI) is to be paid i.e Rs 100, then the actual principal taken on loan would be Rs 1000 and NOT Rs 1100 (As claimed by the bank)

And you still have 11 EMIs to pay.

And at the end of 12 EMIs, you would have paid Rs 1200.

Till here it is in line with what the bankers claim.
Now comes the not-so-apparent part of the deal.

Your effective interest % is (1200 – 1000)/1000 * 100 = 20% and NOT 10%!!! (Rs 1000 being the actual loaned amount)

Add to this the processing fees etc, and your actual interest will more than double. And if more than one Advance EMI is taken, then the actual interest % becomes even bigger (30% for 2 AEMI, 40% for 3 AEMI and so on)

This scam is not new and most of us have faced this. Only, none of us choose to question it. I wonder why the RBI is still allowing this to take place. These private banks are actually cheating people out of their hard earned money and no one seems to be taking them to task. While they claim to take 10% interest or so, in reality they are duping the consumer into paying 20% or more interest.

Recently I was faced with yet another “attractive loan offer” from a private bank.

I gave them my conditions.

1) NO Advance EMI
2) NO Pre-Closure charges
3) NO processing fees

Of course the representative of the bank was taken aback and refused to give me the loan under these terms to which I replied “That’s fine by me because all I need to do to secure a loan in this economy that we live in is to walk out into the street and shout ‘I need a loan’. So, unless u wake up and smell the cookie, it’s your loss!!!”

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