Beware of ‘teaser offers’

Think before you switch your service

SAJAD BAZAZ
Srinagar, Publish Date: Aug 22 2017 10:11PM | Updated Date: Aug 22 2017 10:11PM
Beware of ‘teaser offers’

Let me expand last week’s deliberations on the deteriorating customer service where element of trust between banks and customers has disappeared. The lack of enthusiasm in customer service has witnessed erosion in loyal customer base of the banks. This has led to twin challenges for them which include retention of old customers and at the same time bringing new ones into their fold. 

Actually the kind of choices available in the market to shop financial products at convenience and with personal touch have put a lot of pressure on banks to drive loyalty in the long term. It’s here ‘switching services’ originated. This is the mechanism where customers transfer their bank accounts from bank to bank to earn more interest on their deposits or get rebate in interest on loans. In simpler terms, a borrower is encouraged through some ‘concessions’ to take a new loan from another bank to repay his existing loan.

Normally, ‘switching’ takes place in loan segment. Any loan, be it a car loan, an education loan, a home loan or a personal loan, can be transferred from one bank to another. However, it’s the home loan where most of the switching has taken (is taking) place.

Borrowers using switching route is not bad, but there are certain riders which need to be evaluated before taking a flight on the route. For example, a borrower can take commanding position and ask his/her existing bank for re-pricing options, before actually switching his loan to other bank.

Let me share an example. Some time back, one of my acquaintances obtained a housing loan from a new generation private sector bank. Even as he was repaying the loan instalments regularly, a teaser offer from another bank provoked him to explore switching his loan. The ‘teaser offer’ contained an interest rate which was almost 2.5% below what he was actually paying on his loan. However, he proved wise enough to save himself from the ‘tricky’ offer after doing cost benefit analysis.

Of course he was saving over Rs.50,000 as against switching fee of Rs.30,000 to be paid in one go. But he would have received the benefit in small instalments over 10, 15 or 20 years (repayment period of the loan).

Notably, teaser offer is an introductory interest rate (lower than the normal rate) charged to a borrower during the initial stages of a loan. This rate is not permanent and takes a flight after it expires. The borrower is charged actual interest rate and most of the times higher than the normal rate.

The decision to switch has to be based on more factors than just interest rate. It’s not free. As a borrower intending to avail switching service, you should first ask your current bank whether you will incur a fee for terminating your existing loan or you can convert the loan to one which is more attractively priced. Check if any fees will be imposed on such conversion. Before switching to the new bank whose refinancing package you are considering, check how you will be better off with the refinanced package.

One should note that the instalment amounts and interest payments will change once there are changes to the loan package. Also, compare the present repayment schedule for your current loan package with that of the new loan package you are considering and check the total amount of interest payable and other charges.

After calculating the net impact, if you find the cost of switching higher than your savings after the transfer, then the switch does not make sense. It also needs to be taken into account that transfer costs are to be paid immediately, whereas your savings after the transfer will come to you over the years.

Technically speaking, loans with low outstanding amount and a few years of repayment remaining are not ideal for switching. The costs involved would be higher than the expected benefits.

And last, but not the least. Try to understand the ‘teaser offer’ meticulously. Check why the bank, where you want to switch your loan is offering a lower interest. Don’t rush into any hasty decision. Remember, the banks are locked into a stiff competition. Their profitability over the years has witnessed erosion. The only way to restore their profitability is through the business of loans. So, why would one want to give you loans at a lower interest rate and lose profits when others in the market are earning a higher rate of interest?

 

(The views are of the author & not that of the institution he works for)