Rip Off - ICICI Bank's Two Wheeler Loans

I recently bought a Honda Activa for Padmaja. Cost, approx Rs. 44,000/-, including accessories, tax, registration fees, insurance etc. We had already decided on the Activa before I went to the Pratul Honda show room In Raj Bhavan Road, Hyderabad. I had also decided to pay cash for the transaction rather than take a two wheeler loan. But I wanted to see what was on offer on the loan front. So I asked about loans and was directed to the loans section.

There I met a couple of chappies representing ICICI Bank who walked me through the process. I spoke to them about two wheeler loans and learned how the banks are ripping off people by playing to their lack of awareness about matters financial.

This is what the loan agents told me:

1. There are two loan tenures, 16 months & 22 months.
2. There is a 3% processing fee.

After scribbling all this on a piece of paper, the first chap pulled out a regular calculator and started punching keys. Here is the data he used:

Cost of Vehicle: Rs. 42,712/-

16 Month Tenure:
Down Payment (Inclusive of 3% Processing Fee): Rs. 13,446/-
EMI Paid For: 16 Months
EMI: Rs. 2,192/-

22 Month Tenure:
Down Payment (Inclusive of 3% Processing Fee): Rs. 16,858/-
EMI Paid For: 22 Months
EMI: Rs. 1,473/-

He then pushed the paper at me and asked me "Which option do you want?". I said "Hold on, I have a few questions.".

Questions:

1. Are you collecting any Pre-EMIs?
2. What is the rate of interest you are charging?

Answers:

1. 2 Pre-EMIs, for both options.
2. Interest rates are 8.00% for the 16 month loan and 9.50% for the 22 month loan.

Note that the Pre-EMIs were not mentioned till I asked about them.

At this point I pulled out my HP 10B Financial calculator and punched in the numbers for the PMT function. Results:

16 month tenure - Actual Interest Rate: 2.53% per month or a whopping 30.40% per year
22 month tenure - Actual Interest Rate: 2.27% per month or a whopping 27.28% per year

Using ICICI's interest rates and ignoring the 3% processing fees, the results should be:
16 month tenure: EMI Rs. 1,921.69/-, or Rs. 270.31/- less than the quote
22 month tenure: EMI Rs. 1,275.03/-, or Rs. 197.97/- less than the quote

What is going on here?

It is actually rather simple. What is happening is this;

The down payment is the sum of three things:

1. Actual down payment
2. 3% processing fee
3. 2 Pre EMIs

Now comes the trick! The quoted interest rate & EMIs are calculated on the actual down payment figure, ignoring the 3% fee & the pre-EMIs! Voila! 8% Interest Rate!

But what does the customer pay? Approximately 30% per year in interest. How? Simple.

Actual down payment = Rs. 13,446/-
Therefore, actual loan amount = Rs. 29.266/- (42,712 - 13,446)
Actual EMI Paid = Rs. 2,192/-
Actual Tenure = 16 months
Hence REAL Interest Rate = 30.40% per year!

(See this Excel document for the calculations)

By fudging the data and showing only part of the calculation these guys are taking people for a ride. They don't mention the Pre-EMIs at all unless asked. Their calculation is not based on what the customer actually pays but on fudged data that is hidden from the customer. The numbers are close. Note that the difference in EMIs as shown above amount to about Rs. 200/- per month. Unless you do the math, this 200 figure will vanish in the EMI number and not be apparent at all!

When taking a loan I always do the calculation myself. I use a financial calculator but Microsoft Excel is an excellent tool for this purpose. Learn to use it and you will not be cheated!