As you are aware, all financial products are getting mis-sold these days. LiveMint published an article in Dec’19 stating despite repeated warnings by the RBI to banks, mis-selling of financial products are rising and have doubled in FY18-19 compared to the previous financial year.
We will explain to you the tactics used by a lot of agents to mis-sell loans and insurance in this article. So that you are more aware while taking these products.
Misselling in loans
We hear a lot of stories about how a particular insurance product was mis-sold or how that investment scheme turned bad but seldom you would hear about a mis-sold loan.
Does mis-selling happen in loans as well?
Since everything is pre-decided in loans, there are limited or no scope of mis-selling or at least that is the most common assumption accepted by many. But like all financial products, there is more to this than what meets the eye.
So the answer to the question is “yes”, mis-selling can happen and it does happen in loans as well. If you are planning to take a loan, do check out the following areas before signing the loan agreement.
How does the misselling happen in loans?
We have identified 4 critical areas where most of the mis-selling happen in loans.
Interest Rate type
While taking any loan, most of us take the interest rate part very seriously. As the repayment amount completely depends on this. We all want the lowest interest rates possible for the loan.
However, the tactic used by agents is to tell you the flat interest rates while the product is having a reducing rate of interest. To understand the difference between them, if you take a loan of Rs 5 lacs for 3 years tenure with 14% reducing rate of interest. The overall interest paid by you will be the same if the loan is charging a flat interest rate of 7.7%.
In flat interest rate, monthly interest is calculated on the principal amount (5 lacs) while in case of reducing interest rate, monthly interest is calculated on the outstanding loan amount.
Note: Almost all loan products are now moved to reducing interest rates. Beware if some agent is selling you a loan product in flat interest rates.
Floating vs Fixed Interest Rates
As the name suggests, the floating interest rate keeps on changing and is revised every quarter. The base rate is calculated by RBI based on the economic factors. If the base rate changes, the interest rate of your loan changes as well. While in case of fixed, the interest rate is fixed for the whole tenure of the loan.
You should choose a fixed-rate only if you think the current interest rates are the lowest possible and it will not go down further in future. In all the other scenarios, please choose a floating rate as in most cases the interest charged will be lower than in case of fixed and there are no prepayment charges.
If you have an existing loan, you must check if your interest rate is linked to RLLR (Repo linked lending rate) i.e. basically if your loan has a floating interest rate. If yes, then you know that whenever there is a rate cut announced by the RBI, you have a chance to reduce your cost of borrowing.
On that condition your interest rate is fixed then we would recommend you close the loan and move to one which gives you a floating rate option. Unless the interest rate is very low (7% to 8% annually). Else you will miss out on interest savings.
This type of mis-selling in loans is the toughest to solve as banks will fight tooth and nail to not change their interest rate structures.
As you are in the process of applying for a loan, this fee gets charged at the time of the loan sanction. This is an easy place to identify if you are being mis-sold.
Suppose you want to take a personal loan of Rs. 2 lacs for 3 years. What most of these institutions will do is they will mention the interest rate as low (i.e. 12%) and the processing fee to get this loan will be mentioned as a whole value (i.e Rs. 4000/-).
Now in front of Rs. 2 lacs, that Rs. 4000/- will appear real small whereas it actually pushes your interest rate up by 1.15% to 13.15% in reality. You can do the calculation by yourself.
Most of the banks/NBFCs try to keep the interest rate as low as possible while charging a processing fee up to 2-4% of the loan amount. This is done intentionally to lure you as the interest rates remain our main focus while taking a loan.
This fee is charged if you want to foreclose or pre-close your loan. Banks/NBFCs get the most value out of a loan if it is not foreclosed. Most of the Banks/NBFCs don’t even mention the foreclosure charges. They just mention that there will be some foreclosure charges in case you want to pre-close your loan before the tenure ends, that too with many conditions.
That something at the time of closure can be anything in the range of 4% to 1 EMI or 15 days extra interest. You just don’t know. There are even conditions you need to fulfil before foreclosing your loan. For some loans, you can only foreclose after you have paid 12 EMIs on time or the foreclosure can only be done if you pay via cheque/Demand Draft.
Paying via cheque or DD can be cumbersome for most of us in today’s time. You must ask them to include other payment options as well for foreclosure. Make sure you get everything in writing upfront while taking any loan.
Misselling of Insurance
Insurance is the most mis-sold financial product of all time. You can’t really escape the mis-selling of insurance and this is now driving a lot of mis-selling in loans as well. They are mostly sold as a cross-selling product.
The results clearly establish that bank agents are driven by their internal incentive structure and are not really concerned about what the customer needs. The study finds that while agents in the private banks recommend products with high commission, as their variable pay is linked to sales, clerks in the public bank recommend fixed deposits because their promotions are partly dependent on deposit mobilization.
Insurance has the highest incentive among all financial products, hence making it the most mis-sold product of our time.
How does the misselling happen in Insurance?
Most of the time, insurance will be cross-sold to you as a by-product. If you are taking a loan/credit card or any other financial product, you will be asked to take insurance as well. There are many common techniques insurance agents use to mis-sell. We have identified 3 critical areas where mis-selling happens in insurance.
While taking any loan
One of our colleagues was mis-sold insurance as well as a credit card while taking an education loan for his college tuition fees. Now a student has no use of a credit card at all. Still, it was sold.
Besides, you can not sell a credit card directly to a student without any collateral. It is highly risky. So the bank agents deduct some amount from the education loan to start an FD to act as a default guarantee for credit card payments. Quite absurd!
A farmer was mis-sold traditional insurance policy while he just wanted a Rs 5 lac loan. They just disbursed Rs 3 lac and rest of the amount went towards the premium of a life insurance policy.
During the loan application (online or offline), the option to take a life/health insurance will be ticked and the premium will be deducted from your loan amount!! So be careful and double-check the form.
The other place where the insurance mis-selling is rampant – when you are taking a home loan. The agency which is giving the loan will force you to take term insurance of their choice. The primary objective is not to cover their risk but get nice fees for themselves.
While it’s hard to negotiate this, the best way to do it is have your application approved by two lenders and then pick the one who doesn’t force you to take this assuming other conditions are fine.
Mis Selling ULIP
- Good Cover
- Lesser charges than ULIP
- Yet, good returns with tax benefits
That is not the case at all for ULIPs. You can read the whole article about this kind of mis-selling. These policies are designed to be a win-win strategy for banks only. Don’t get trapped into such financial products. If you want to save taxes, do smart tax planning.
However, RBI has made few changes in the Banking Ombudsman Scheme 2006 to make Banks more accountable for any kind of third-party cross mis-selling by their agents.
You must know how to get your bank complaints resolved and your rights in case any kind of mis-selling happens to you.
RefreshMint is completely against any kind of mis-selling. Our main objective is to protect you from mis-selling. If you ever got mis-sold or you want an opinion about the product that was sold to you by an agent, you can reach out to us on Twitter/FB/Linkedin. If you are putting your complaint on social media, do tag us. We will try to help you as much as we can.