Dual rate loans are a fixed-cum-floating rate loan that starts off with 1-5 years of fixed interest rate and after this time period morph into an adjustable-rate home loan that keeps up with the retail prime lending rate. Sometimes these fixed interest rates are set unbelievably low (and hence they are called teaser rates) and then shoot up to market rates after the honeymoon period is over. In fact, SBI was forced to pull back their teaser rates after relentless pressure from RBI. Fixed interest rates vary based on the loan amounts and loan tenure.
The dual rate loans are offered by the lenders:
- To prop up cooling the real estate market
- Lure in ‘fence-sitting’ customers who are trying to put off their house purchase due to high-interest rates
- When they anticipate interest rates to decline and want to trap their customers into paying high-interest rates
- Competition from other lenders
- Meet credit targets when lending slows down
This is quite depressing for the customers, as with the downfall in the economy the rates have increased, and with the trend that the dual rate loans will change into floating-rate, the customers will have to suffer. The new customers will have to pay an additional 0.75 % to 1 % extra rate.
Companies like LIC Housing Finance introduced an exclusive offer. In that, for a period of 3 months, the rate of interest for a Home Loan will be fixed at 10.40 % and after that, it will be floating at a rate of 11.90 %. Despite the orders from RBI to ban pre-payment charges on the floating interest rates.
If a customer wants home loan interest rates to be floating, he/she will have to pay a high pre-penalty charge which is more than 2.25% plus service tax. Now the customers have to pay Dual Rate Loans.
You should avoid dual-rate loans as you will have to pay heavy rates as it is the trap for customers to sign up a long term contract with high charges.
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Special Note: An individual must examine the whole EMI amount payable to the lender with the Personal loan EMI calculator.