Nowadays, most people applying for home loan many never even go to the bank and all the process is done by middleman/agent/friends or relative working in bank for our convenience. Loan documents require a lot of signatures and contain lot of annexure, so we don’t bother to read them and rely on our agent.This kind of practice can get us in trouble while signing the home loan documents and due to your casualness and trust you may be sold some junk product along with your loan. Recently one of our clients took a home loan from a leading public sector bank after a lot of research and study.
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Real Case Story

He was sanctioned a loan of Rs 22 lakh. In the duration, hundreds of papers were signed by him telling him that these are all formalities and are needed.

However, when the first disbursement was made, he came to know that the total sanctioned amount is Rs 22.90 lakh. When he enquired, he was told that the balance Rs. 0.90 lakh is the amount of single premium towards an insurance policy that the bank has paid to a Life Insurance company for insuring the home loan of Rs. 22 lakh for him for full tenure of 20 years in case of his death.

This was never told to him clearly and he has to now pay the Emi for the additional amount. But the loan was sanctioned by his own relative, so he was so persuasive and explained him that it is mandatory (even if it is actually not).

Cost of Loan

What could have happened in the above case? He was supposed to take a loan of Rs 22.90 for 20 years, and his EMI would be Rs 22,480 / month whereas the loan disbursed to him was Rs 22 lakh. According to loan disbursed amount of Rs 22 lakh, the EMI should be Rs 21,596 /month for 20 years. In this way, his EMI has increased by Rs 884 per month for tenure of 20 years. It implies that he would have to pay extra of Rs 2,12,160 for whole tenure of loan in which the bank has not only disbursed 0.90 lakh wrongly but is also charging interest on the same. It is really painful to him due to this unscrupulous activity by bank official.

Unlawful Activity by bank

The fact that the customer came to know about the home loan insurance after the loan was sanctioned clearly shows that Bank operations was not transparent at all and the customer was taken for granted. How can you sell him home loan insurance without even telling him? This has to be communicated well? Was there a personal one to one communication done with the customer on whether he can afford the insurance premium or not.

The purpose of bank was to earn unlawful commission from insurance agency at your cost. Also the cost of insurance is much higher than the prevailing market rates. A normal term plan with 22 lacs cover with 20 years tenure will cost less than Rs.0.50 lac, but a policy worth 0.90 lacs was issued and no one even cared to understand it from customer point of view. This clearly shows the in-sensitiveness of the bank officials involved in the whole process.

Onus of Customer

This kind of unfair practice exists all over the world and are going to remain here. You should read the documents very thoroughly before signing and make sure why and what is that signature for. You can straight away reject saying that if there is an extra charge you will not go ahead and in most of the cases if you do not sign also they will sanction you that loan without that insurance. Mistakes are from client side too but you have to understand…some skills of this sales people are so good to prove you that whatever they say is right…. If nobody in the bank replies properly and only assures that the insurance will be returned if the loan is prepaid. This is only a way of fooling customers.

Hence, while processing of home loan from any bank, you should keep a note of this insurance amount and never let to consider in your home loan because they will charge interest on your insurance. Instead, if you really want properly loan term insurance then tell them that you will arrange the same from your own fund. By this, you will take term insurance at lower premium also get income tax deduction under section 80C.

You need to be vigilant .This may not be possible always but we need to be more or less alert depending on stakes.

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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