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Last Updated Monday October 23 2017 05:55 AM IST

The magic of percentages

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Market

The marketing strategy of forcing loans, investments and insurance policies on clients by presenting numbers in percentages will entice anyone. When the eloquence of the adviser combines with advertisements and brochures that display rates of interest in percentages in big letters, it is natural for clients to fall for them. Later, when clients realise their mistake and enquire about them, the companies will escape under the cover of signed contracts printed in small letters. People should know the tactics used by agents who market financial services using percentages.

Loan at 8.5 per cent interest

Most financial institutions charge a generally high annual interest rate of 12-18 per cent for personal loans and vehicle loans. Amidst them will be companies, which advertise that loans are available at an annual interest rate of only 8.5 per cent or 9 per cent. In normal loans, a certain sum is deducted from equal monthly instalments to repay principal and interest for the next month is calculated on the diminishing principal. However, those who offer single-digit interest rates charge a flat interest on the whole principal throughout the loan period. For example, if a loan taken for three years at a flat interest rate of 8.5 per cent is calculated as per diminishing balance rate, it can be seen that the real interest rate is about 16 per cent.

Bonus and revisionary bonus

In life insurance policies, percentages appear in sweet names such as bonus. When it is realised that the bonus percentage is on the sum assured and not on the premium paid, real capital increase even in the long term will be less than 6 per cent. Percentages appear even in marketing life insurance policies linked to units. Investors should know the discrepancies in offering high amounts calculated by using the highest rate of growth recorded by the market for the whole policy period.

13.7 per cent return on bonds

Advertisements that offer a high annual rate of return of 13.7 per cent from debentures and bonds appear regularly. In reality, the interest earned at an annual coupon rate of 11 per cent is added every three months to the principal to project a compounding rate of 13.7 per cent. Investors should know the difference between the interest earned at coupon rate from bonds and the yield when the investment matures.

20 per cent down payment

Advertisements of flats that entice investors by demanding only 20 per cent down payment will also state that home loans need to be repaid only after taking possession. What is hidden in this is the fact that the client has to pay the interest accrued from the date of signing the loan deal to the beginning of payment of equal monthly instalments. The delay made by the building company in completing the construction of the flat suitable for possession will further raise the client’s interest burden.

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