Why Retail Overdraft Accounts are better than Personal Loans?

I am sure all of you are aware of Fixed Deposits where you pledge your money to a bank for a fixed amount of time and earn a rate of interest on the same. Most Middle class Indian families have some amount locked in fixed deposits. However, very few people are aware that these deposits can help them get liquidity on a later date at an affordable rate of Interest.
I have 2 lakhs locked in a fixed deposit which fetches me 9% p.a. Now I need some cash to buy a Car for example a TATA Nano which costs in the range of Rs.125,000 to Rs.130,000. Most people would prefer to take a vehicle loan which will cost anywhere between 14% p.a. to 16% p.a.
A better option would be to go to the bank where you hold the fixed deposit and ask them for an Overdraft against the Fixed Deposits of 2 lakhs. Most Banks (especially the Indian Banks) sanction an OD Limit of upto 90% of your Fixed Deposit Amount, at an Interest Rate which is 1% to 2% more than your Fixed Deposit Interest Rate. So I would be eligible for a Loan of Rs.180,000 at 10% p.a. The best part about this product is that the Interest is charged on a daily average balance method and I pay interest only for the days on which I borrow the money.
This has the following benefits.
1. In a Personal Loan, I predecide the tenor to be 12 months or 24 months and as a result, the interest gets calculated upfront and gets baked into the calculation. The pre-closure charges are heavy and there may be an hefty pre-closure fee as well
2. In the Overdraft, I write out a cheque of Rs.125,000 for my Nano car. After a month I get my salary of Rs.50,000 (or any cashflow) which I can temporarily park in this account. When the Interest is calculated for the month, I save interest to the extent of this amount.
3. In the overdraft you effectively get charged an interest rate of 1% or 2% only, as you continue earning money on your Fixed Deposits and do not need to break the same.
Due to some technical reasons, I am unable to post an Excel Model to show how much Interest you save, however feel free to write to me at the address mentioned below and I will mail the same to you. For any queries on Overdraft accounts or any questions you have in the personal finance domain, do feel free to write into Ask.Pranav@Gmail.Com. I will revert to your query within 48 hours.

How to choose your Bank?

After extensive research on the Internet, I have not found a single article, writeup which tells Retail Customers how to choose their bank. Hence I though I would write a post on the first principles of banking which helps retail customers such as me decide which is the best bank to bank with.

In my opinion Retail Customers are of 2 types. The first is the group which belongs to my parents generation who have banked with a nationalised bank or co-operative bank all their lives. A weekly trip to the bank is a visit which is very exciting and they go there and have a 15 minute chat with the branch manager discussing recent weddings in the community and other similar topics. They attend the Poojas at the bank branch and do not mind the endless wait and bureaucracy and feel extremely elated in withdrawing money in the form of crisp budles handed to them by the cashier. If you are in this group, then I suggest that you do not read my blogs further as I am completely out of sync with these people and cannot identify with their banking needs either.

The second group of people, to which I belong, follow the principles listed below. We choose the banks based on the weightages that we assign to each of the following parameters.

1. Doorstep Service : Need a sales person to visit us for all documentation and instructions. We would prefer not visiting the bank branch at all, due to a shortage of time. We would prefer it if the sales executive does all the photcopying, filling in the application form and we will just sign it after detailed inspection of the form.
2. Remote Banking : We are very comfortable with Internet Banking, Phone Banking and SMS Alerts. We would like to have all our baking relationships on our fingertips. We monitor our portfolio from the comfort of our homes and we should be able to pay bills, transfer funds, track my credit card spending on the Internet. It is better if linking is possible between my cards, loans, investments and bank accounts so that I can make cross payments across these relationships with ease.
3. Consolidation : We would like have all our Personal Loans, Home Loans, Credit Cards consolidated with a single bank for ease in linking the accounts and making cross payments. It is important that my banks offers all the products so that I do not want to start a fresh relationship with another bank and build a relationship with them.
4. Zero Tolerance to Hidden Charges : We have zero tolerance towards hidden charges, fees which have not been disclosed upfront and arm twisting tactics. We will not hesitating writing to the RBI / Banking Ombudsman in the event of unfair practices being employed by the bank
5. Best Rates : We would like to avail Loans at the best interest rates available in the market. However we would not mind paying a bit higher in terms of interest rate for personalised service.
6. Quick Complaint Resolution : We understand that there is an error rate of upto 1% on all banking processes. However, we will would expect a speedy resolution within a week once the issue is highlighted

Very obviously, you are looking for how the various banks in India fare on each of the above mentioned parameters, and I am trying to research the same as well. But as I do not have personal experiences with each of the banks, it would be unfair of me to take a call on the same.

However, do write in to me at Ask.Pranav@Gmail.com and I will help you choose the bank which is best suited for you after understanding your personal requirements.

Why you need financial education ..

It is beneficial for all to be well versed with the details of Personal Finance, especially if you are a young working executive earning anything from Rs.10,000 per month upwards. In India, we have over 50 different banks which are proactively approaching us for products which vary from Credit Cards, Personal Loans, Holiday Packages, Demat Accounts, Unit Linked Insurance etc and we rarely do any research before signing up for these products and land ourselves in a soup. Experts (as well as your long time chartered accountant) can be wrong in their facts and recommendations.

You need to be able to choose products which satisfy your banking / personal needs and believe me, it is not easy doing that!! I have personally faced numerous problems in the last 2 years and I thought I would share some of my insights on the various products which are on offer today.

1. Credit Cards can be your best friend or worst enemy, with an Interest rate upwards of 35% p.a. you need to be very careful of how you use this product, but it is important to note that the best deals and discounts are only offered to Credit Card customers. Over 200 credit card offerings throng the Indian Market today and many more are launched everyday, you need to know which works best for you.
2. Bank Accounts come in different shapes and sizes such as Savings Account, Current Accounts and Overdraft Accounts. They have different Interest rates and different minimum balances, the fines imposed for not maintaining the minimum monthly balances are also different. What should I really look for before choosing my Bank? Home my subsequent posts help you answer these questions.
3. Personal Loans and Home Loans all appear the same - however in reality they are very different in terms of the fees and penalties. You need to match your loan, not only to your finance requirements, but to your long term financial strategy as well. Processing Fees, Preclosure Fees, Manner of computing Interest (Daily Reducing Balance, Monthly Reducing Balance, and Yearly Reducing Balance) will make a huge difference to you financially. It is a pity that these points seldom feature in our discussion while availing a loan.
4. There are a plethora of Investment Options available to the average Indian Customer, ranging from Stocks and Mutual Funds to Fixed Deposits and Gold. What are the details of each of these investment options and which one is best suited to you? A lot depends on the liquidity that you require at any given point in time.
5. Insurance, this is the most mis-sold product by banks and agents in
India. Be rest assured that most insurance companies and referring banks, do not disclose all that you need to know about your policy. I myself have a Birla Sun Life Insurance Policy (ULIP) where 60% of my first year premium of Rs.60,000 was eaten up by the agent / insurer / partner bank and only the remainder was invested. Believe me these agents are ruthless. However, Insurance is a great product which can be extremely beneficial - but please be in the know on what you are signing up for.
6. Tax Planning is something which most people spend very little time on. The prevailing opinion is that it is best left to the Chartered Accountant. But no one knows your financial needs better than you. So please pull up your socks and learn the ways in which you can save tax. Some of the best options are Rent Benefit, Interest on Educational Loan, and Interest on Home Loan, Health Insurance Policies, and Donations to Educational Institutions etc.

There are several questions which come to your mind when you apply for a financial product, I will try to help you find answers for them. My objective is to promote financial education through my posts which will cover various issues pertaining to the above mentioned products.

You can feel free to write to me on Ask.Pranav@Gmail.com and I will reply to your queries within 48 hours. Thanks & Happy Banking!