How I Managed a 11% Interest HDFC Personal Loan with Zero Pre-closure Penalty?

In 2016, I wanted to take a 10 lakh personal loan to start my business.

Since I had an account with HDFC, I reached out to them. They gave me a loan offer with 20% fixed interest and 1% pre-closure penalty.

Considering that a personal loan was the only option, and it did not need any collateral, I considered going ahead.

In a few days, I received a marketing call from Standard Chartered asking me if I wanted a personal loan. Since I was about to sign the papers with HDFC, I said “yes”.

SC came back with an offer of 15% reducing rate and 1% pre-closure penalty.

I was not aware of the difference between a reducing balance and a fixed rate. The SC team explained to me how reducing rate is better because you pay less over time. It made sense. I decided to go with SC.

The next day, I received a call from my HDFC relationship manager asking for documents. I mentioned to her that I got the offer from SC for 15% reducing rate. She immediately matched it saying she’ll give the loan for 14.99%.

The aha moment!

I realized that taking a loan is a negotiation game. Based on other offers, banks will give you a much better rate.

I went back with this offer to SC. They could not lower the rate anymore and instead offered to waive off the pre-closure fee.

Since I was in my notice period and wanted the money fast, I did not bother to bargain much and sealed the deal. I was happy. I got 15% reducing-rate plus no pre-closure penalty.

The upsell

6 months passed after the loan was disbursed. I got a call from SC asking if I wanted a top-up loan. I didn’t need one. So I politely refused.

But the salesperson wouldn’t take no for an answer. She offered a counterproposal. If I took another loan of 2 lakhs as a top up, she’ll reduce the interest rate to 13%.

It was tempting and I went for it. I felt smarter about myself.

On hindsight, I realized that it was bad to take on more debt for a small interest rate cut, especially when I didn’t need more money.

The final transfer offer

1 year passed after getting the loan and I get another call from HDFC asking if I want a personal loan. I mentioned that I already have one with SC.

The sales person offered to transfer the loan to HDFC if I took an additional loan with HDFC. She’ll offer a rate of 11% with the same benefits I enjoy with SC.

My marriage was around the corner and I could use some extra financial cushion. So I said yes.

Finally, I transferred my loan account to HDFC with an 11% reducing rate and zero pre-closure-penalty.

10 lessons you can learn from my personal loan experience

1) If you need a personal loan, take the smallest amount required. It’s natural to apply for more than required – just in case.

Don’t do it.

You’ll end up making silly financial decisions since you have more money than you need.

2) Shop around for the best interest rate. Do not always go with your primary bank.

3) Always negotiate. Try to lock in a deal between 10 to 15% when you start off your loan. Over time, try to negotiate a lower interest rate citing your flawless repayment history.

4) Never miss your payments! It impacts your CIBIL score. Banks will not offer a lower rate to you since you are now considered as a risky customer.

5) Don’t take top-up loans. It’s tempting. But getting more money, unless absolutely necessary, is not a good idea.

6) Negotiate a zero pre-closure. In the future, when you have enough money, you can pre-close the loan and save interest payment.

7) Always go for reducing interest loan products. Fixed interest looks cheaper, but they are in fact costlier over time.

8) Don’t fall for bundled insurance. It’s not required most of the time.

If your bank tries to sell you insurance citing it’s mandatory, mention the name of some other bank and say they don’t enforce this. There’s a very good chance that your bank will drop this requirement.

9) Don’t try arbitrage opportunities. If you get the loan at 10% and some mutual fund investment firm claims their customers have made 20%, you’d think it makes sense to take a loan to invest.

Don’t!

Markets are volatile. There is a reason they say “past performance is not an indicator of future performance”. Never invest for arbitrage purposes. That’s gambling.

10) Start early. If you know you’ll need the loan, start looking out a bit early. The closer you are to when you need the money, the more desperate you’ll sound. Banks will understand this and you’ll have less negotiation power.

Some more tips to keep in mind while taking a personal loan

1) Most banks usually don’t let you prepay before 12 EMIs are complete. Keep this in mind while planning for pre-closure.

2) When you receive the money, transfer it to a liquid mutual fund. Withdraw only the amount you require, when you require. This will ensure that your money grows while it’s not being put to use.

3) Do not park your money in equity mutual funds as they are volatile and can have additional exit loads. Debt funds can also be slightly volatile.

4) Even though you get pre-approved for loans, most banks will have a verification in place.

5) Banks know how many others you have gone to for the loan. They can see the requests made by others on your CIBIL history. Too many loan applications can negatively impact your chances of getting a loan.

6) Your credit score matters. Banks will decide to offer you a lower interest rate based on your credit score. My credit score is more than 800. That helped.

7) The higher the loan amount, the more inclined the salesperson will be to help you close the deal. They have monthly and quarterly quotas to meet. It’s better for them to close one, 10 lakh loan compare to ten, 1 lakh loans.

8) Read the loan documentation carefully.

Make sure everything the salesperson offered you over the phone or in-person meeting is mentioned in the document. Do not sign the document unless it’s included in writing.

9) Your take home amount matters. So does the company you work for. These are important criteria for getting a personal loan.

10) Make sure that you set aside 3 months of EMI amount from the loan for emergency purposes.

11) Unlike home loans, there is no tax-benefit for personal loan interest payments in India.

What about my personal loan?

I still receive calls from other banks offering a slightly lower interest rate if I transfer to them by taking a top-up loan. But I say politely say no.

With experience, I am now financially wiser.

I have saved up 80% of the loan amount. By July 2018, I will pre-close my loan and become 100% debt free.

Update: I am now debt free 🙂 I have paid off all loans and have started building a healthy investment corpus.

What are your thoughts?

Have you taken a personal loan? Do you have any tips for share? I’d love to hear from you. Make sure you add your thoughts below in the comments section.