In a recent twitter conversation, it turned out that builders are offering “interest free loans” to customers. A company called “Investors Clinic” is offering what are zero-interest loans to customers(Source).
- You pay 10% down now
- You then pay the rest over 100 monthly installments
- There’s no interest charged
Fantastic, you think? Not so fast. These deals are too good to be true, because of one thing:
Risk: Will the Builder Deliver?
All projects mentioned are under-construction. You don’t know when you will get possession – even if a project looks like it’s “in progress” the real progress could be next to nothing because the builder’s in a massive cash crunch. Until the real estate bill comes along, there is no way for you to even know if your money will go to the same project you are buying (since they can move money to another project that is even more crunched for cash).
And then, it’s a 100 months. That’s over 8 years of paying money. They don’t have to give you possession for 8 years. Even for a project that is current. Why? Simple – you haven’t paid the full amount yet.
This is stuff builders ALWAYS pull. Some projects are now over 5 years old, and still have no sign of completion. Even if you think the “zero” interest is a good deal, this risk is enough to dramatically increase the cost for you.
And it’s not ZERO interest – the interest is built into the price
If I tell you – here’s a TV, you pay only Rs. 1,000 per month for 50 months, it’s a Rs. 50,000 TV, 40 inch LED, interest free! Only you can use the TV after 50 months only. Good deal?
You’re thinking – dude, I can get a 40 inch LED in the market for Rs. 30,000, and use it immediately. Why should I even bother?
That’s precisely how this zero-interest scheme works with real estate. You pay now, you don’t get to use the product. And there are alternatives that are far cheaper. Consider one project listed where the price for a 1620 sqft property is supposed to be Rs. 92 lakh. The same project is on Magicbricks available at a resale rate of Rs. 67 lakh.
You can do a complex math to calculate the value of a Rs. 92 lakh house, where you pay 10% upfront, remaining over 100 months, keep the cash in a fixed deposit at say 7%, and pay over time – and you will still reach a net value of about Rs. 71-72 lakh. And you’re getting stuff cheaper – the actually price will be even lower once you negotiate.
Plus, builders who simply can’t get loans from financial institutions are now using this rule to borrow from you, at relatively lower rates. For them, it’s a lower cost borrowing and you’re too small to retaliate if for any reason they delay even beyond the 100 month limit.
Lastly, Non-Refundable Fees
You have to pay some Rs. 12,000 or so for booking, and that’s not even refundable even if the builder gives you a crap apartment location or such.
Our View: Sucker Deal!
Most under-construction offers by RE companies are just to sucker you. This one is even worse – it pretends to be a zero interest deal.
There are many bridges available for sale under such offers, and it’s imperative that if you have no idea how to lose money fast enough, you should take such a deal.
But if you’re anywhere close to sanity – and you’ve done pretty well reading to this point – you want to avoid this offer. With a distance that’s larger than a barge pole – so that even if you happen to be carrying one (who doesn’t nowadays), you can’t touch it. Okay, we’re bored of the usual “don’t do it”.