Banks make it unnecessarily complex to compare loans, and their true cost. The government should pass rules making them more transparent and fairer:
First, get rid of the processing fee, and all other charges, like a document retrieval charge or legal fees. These charges shouldn’t be levied anymore than Airtel levies a tower construction charge or a diesel charge or a spectrum charge. A single fee makes it easier for customers to compare loans.
Second, the interest should be on a reducing basis. It’s illogical and unfair that you have to continue paying interest for the principal that you’ve already repaid. To some extent, this is just about how you measure. A 3-year loan with a 10% flat rate of interest is same as a 17.92% reducing interest rate. Notice how much bigger the second number looks. No wonder banks want to use the smaller number to make it sound better. As I said, you shouldn’t have to continue paying interest on principal that you’ve already repaid.
Third, all loans should be overdrafts. You should have a debit card, a cheque book, and access to IMPS, NEFT and RTGS, all free. Remember that you’re already paying the bank via interest, so you shouldn’t have to pay again. As you withdraw money using any of these modes, you start paying interest only from that date.
Fourth, the EMI should never go up. If you paid an EMI of ₹10K this month, future EMIs should be no more than 10K. In other words, floating-rate loans where the EMIs can go up should be outlawed, since they cause inconvenience for people if EMIs go up, potentially leading to defaults or hardship in their lives. So, EMIs can remain the same or go down, not up. Banks can offer fixed-rate loans (fixed-rate for the entire tenure, not just 5 years), or they can offer floating-rate loans that float only downwards.
Fifth, there should be no fee for pre-payments or pre-closure, or limits on the number or amounts of such payments. It should be as flexible as a bank account: if you have two bank accounts, you can transfer money between them at will. Loans should be equally flexible.
With these changes, loans will be simpler, fairer, more transparent, and easier to compare.