Banks prefer credit card payment mode than post-dated cheque for consumer durables

Now banks are promoting payment for consumer durables through credit cards rather than giving loans to buy consumer durables. So if you are planning of taking loan to buy an expensive laptop for your personal use or wide screen 34 inch LCD TV for your family then it is not possible. You have to have credit card for buying these things.

ICICI Bank, India's largest retail bank, is in a procedure of closing down its retail service finance or consumer loans division. Earlier GE-Money and CitiFinancial, two of the most aggressive firms in the segment, have already stopped consumer durable financing.

Bankers say that banks which are still having consumer loan divisions would rather not give out such loans.

The post-dated cheque is being taken over by credit card payment mode. "Cost of operations in the consumer durable loan business is very high because of the small tenure and small ticket size," says an official from Kotak Mahindra Bank.

Then what should consumers do who are looking for credit to buy a consumer durable? They have to search for a merchant EMI (equated monthly installment) scheme between a bank and a product maker/seller. Under this scheme, the price of the product is split in 0% EMIs across 3 to 24 months.

"The price of the product is added to the overall credit card limit of the customer. These loans are normally through a tie-up with the merchant or a seller. The EMIs are for a short period - normally six months to one year - and it's a win-win for both banks and customers as the latter get reward points for payment of EMIs," said an official from Axis Bank.

Bankers say it is easier to keep track of a borrower through the credit card, especially when there is rise in defaults on consumer durable loans.

In case there is no merchant EMI scheme for the product and no consumer durable loan is available either, then the other option left with consumers is to take a personal loan on credit card. "Using credit card to pay a loan means a bank saves on processing cheques and it is also easier to track the loan repayment," says the official from Kotak Mahindra Bank.

Similar to most of 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.

One thing to be taken care is that late payment on these loans invites rates of interests similar to those on credit cards. And the interest can vary anywhere from 40-45%. The interest charged will be double i.e. interest charged will be over and above the interest charged for the personal loan.

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