“Those who forget history are condemned to repeat it”

I cannot help but lament at the wisdom of our bankers. Home loans at 8% for the first year and 9.5 % in the second year and third year are currently being offered. Auto loans are being offered at similar terms ie 8% for the first year and 10% for the second and third year. We seem to be getting into a selling mode again.

To be fair the above offer is attractive and competitive. But what is bothering is the step up interest without consideration of the future potential. We appear to have marginally escaped the massive downturn that occurred in the Global economy. India has shown to be lesser affected than the others. Stock markets have bounced nearly 100% from the lows. When India is recovering in a still severely ailing economy it does make sense to wait before launching aggressive schemes. The current recession was even compared to the Great Depression of the 1930. We have learnt many painstaking lessons over the decades but seem to have forgotten in a few months.

Now what is the problem with the philosophy of such schemes? The scheme assumes that the gullible consumer will be willing and able to pay a higher amount in the future years as compared to the current year. This assumption is too risky in the current context. With Paycuts and layoffs still lurking around the corner we are getting into another potential real estate bubble. I understand the impetus required for the real estate market but this would again give a false sense of comfort where the burden is going to increase in the future. The customer may find himself in Jeopardy. Going by Warren Buffet’s words the borrower becomes the slave of the lender. Once signed up he is not going to have a choice but to foot higher bills. In a country where home is placed as an emotional attachment, customer seldom look at the transaction from a financial sense and in cases of default, they avoid closing the loan by selling the home.

However all is not bad with these schemes. If used for refinancing this scheme would be definitely being more beneficial for the current home loan customers who pay 10+% interest which is unlikely to be further reduced.

So watch out for any step up costs before signing up these schemes