Looking for consumer durable loan...think again!

Now onwards you will not be able to get the bank finance for your favourite gadget as banks are choosing to stay away from the unsecured lending market, courtesy rising instances of defaults and recovery woes.

So if you were planning to buy an air conditioner or a refrigerator to beat the heat, you are about to feel the heat even more. Not only have the consumer durable manufacturers increased the cost of air conditioners and refrigerators, but also banks have refused to give out loans to buy consumer durables.

ICICI Bank, India's largest retail bank, is in the process of closing down its retail service finance or consumer loans division. This move comes soon after GE-Money and CitiFinancial, two of the most aggressive firms in the segment, stopped consumer durable financing. We at apnaloan.com tried to reach out to ICICI Bank for their comments on this development but were unable to reach them.

So what is the root cause of withdrawing this service? The cost of operations in the consumer durable loan business is very high because of the small tenure, small ticket size and small margin of profit. An increase in number of defaults adds fuel to the fire.

But don't banks lose out on potential borrowers? May be! The move is aimed at promoting credit cards. Bankers feel it is easier to keep track of a borrower through the credit card. Also using credit card to pay a loan means a bank saves on processing cheques and it is also easier to track the loan repayment.

So what is the way out for those looking for credit to buy a consumer durable? Go looking for a merchant Equated Monthly Installment (EMI) scheme between a bank and a product maker/seller. In these schemes, the price of the product is split in 0 per cent EMIs across 6 months to 1 year.

If there is no merchant EMI scheme for the product and no consumer durable loan is available either, then the other option is to take a personal loan on your credit card. Like in most credit cards, these personal loans also have a free credit period of around 45-50 days. After that the repayment EMIs start. The rate of interest charged on the loan is built into the EMI.

The individual should keep in mind that late payment on these loans invites rates of interests similar to those on credit cards. This interest can vary anywhere from 40-45 per cent. This interest charged will be over and above the interest charged for the personal loan.

In comparison, most consumer durable loans used to charge an interest of around 20 per cent. Also prepaying these loans involves paying a prepayment charge of 2-3 per cent on the principal outstanding amount.

But considering the current scenario we find that there are few people who do own a credit card, and now banks will diversify their force to strengthen their credit card spread. So that they are able to take more and more people under their fold.

So beat the heat by exercising other options...