For instance, a borrower takes Rs 20 lakh (Rs 2 million) as loan from a bank. He keeps Rs 5 lakh (Rs 500,000) in the savings account. While calculating the EMI, the bank will charge interest on Rs 15 lakh (Rs 1.5 million).
Most of the banks calculate interest on a daily basis and charge it at the end of every month. The customer has the freedom to withdraw and use the money any time.
Interest calculation is a deterrent for these loans.
"As EMIs fluctuate month-on-month, depending on the usage of cash in the savings account, some customers prefer to stay away as they cannot ascertain the method of interest calculation," said Tushar Narvekar, director, Dream Finance, a direct selling agent.
Also read: India's 13 most debt-ridden states
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