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European Journal of Economics, Finance and Administrative Sciences
ISSN 1450-2887 Issue 20 (2010)
© EuroJournals, Inc. 2010
http://www.eurojournals.com
An Empirical Study of Consumer Awareness on Home Loan
Agreement
M. Vijayakumar
Asst. Professor, K.S.R. School of Management, K.S.Rangasamy College of Technology
Tiruchengode – 637215, India
E-mail: sweet_vijay@yahoomail.com
Mobile: +91 9842052113
B. Subburaj
Professor, Department of Co-operation, Gandhigram Rural University Gandhigram
Dindigul, India
Abstract
The housing sector plays an important role in the economic development of the country.
Every rupee invested in housing adds 78 paise to the GDP. Over 269 industries are directly
or indirectly dependent on the housing sector. There is an estimated shortage of 20 million
housing units in the country with an estimated investment requirement of over Rs 1500
billion. It is important to know about the home loan agreement clauses before signing in it
as it will help the borrower to bargain with the lenders. This study was conducted among
the 281 commercial bank consumers spreading all over Tamilnadu. Convenient sampling
method was employed. The results indicated that the majority of the consumers are not
aware about the various clauses in the home loan agreement and majority of the customers
do not know the importance of reading it. This throws up a challenge to Reserve Bank of
India and National Housing Bank to create the awareness of the home loan agreement.
Keywords: Home Loan agreement, Housing shortage, Consumer awareness
1. Introduction
Home Loan Agreement is a contract entered between the lender and the borrower that regulates the
terms of a loan. But a 47 page document which requires more than 72 signatures from the customer is
not well read by the customer for the reasons known to him. It is viewed by the customer as a mere
formality to get loan and he also believes that nobody reads it. In the hurry to acquire that dream home,
various clauses in the loan agreement are often overlooked. However, these clauses have a significant
bearing on areas ranging from interest rate to repayment schedules. But the problem is when they start
to repay their loans they face numerous problems but there is no avail. In any case, not reading a loan
agreement thoroughly can land the consumer in a problem. Here are the some of the clauses in the loan
agreements which should be browsed for inside a loan agreement and be clarified with the lender.
a. Reset clause on fixed rates: This clause entitles a bank or HFC to change the interest rate in the
future, even on fixed rate loans. For instance, SBI has introduced a clause according to which it
has the right to revise the fixed rate after two years. Corporation Bank and Canara Bank have
reset options at the end of five years. Clearly, most borrowers are misled by the 'fixed rate' loan.
8 European Journal of Economics, Finance And Administrative Sciences - Issue 20 (2010)
b. Force Majeure Clause : This clause says that 'Provided further that from time to time, the bank
may in its sole discretion alter the rate of interest suitably and prospectively on account of change
in the internal policies or if unforeseen or extraordinary changes in the money market conditions
take place during the period of the agreement.' This clause allows an HFC / Banks to 'un-fix' and
raise the rate under exceptional circumstances.
c. Defining a default : According to this clause, if a borrower is not paying the EMIs for some time
alone is not a default it also includes when the borrower, or where the loan has been provided to
more than one borrower, any of the borrowers is divorced or dies (applicable in case of an
individual)", and (ii) "if the borrower or any of the borrowers is/are involved in any civil
litigation or criminal offence." Similarly when the property prices are crashed, the customer has
to give additional security to his/her loan failing which they will become default.
d. Direct disbursement to builders: There is a clause in the loan agreement which says that loan
disbursement can be directly given to the builders and not the borrowers.
e. Assignment to Third Parties: HFCs / Banks can take your authorisation to assign collection and
administration rights on your loan to third parties. "Borrower expressly accepts that the bank shall
be entitled to appoint third parties as the bank may select which gives to such third party all or
any of its functions, rights and powers under this agreement including the authority to collect
MMR (minimum monthly repayment) due by the borrower".
f. Other twisted clauses :
• 'The bank/HFC will be notified of any change in the borrower's employment, business or
profession well in advance.
• In the early EMIs, the proportion of interest charge is far higher than principal repayment.
"Banks should recover the interest and principal amount simultaneously".
• "For document processing, banks charge around one per cent of the loan amount which
should be refunded if the banks ultimately deny the loan."
• The legal jurisdiction in case of disputes is always at the place where the Bank’s central
office is located. "Individual borrowers, who are spread across the country, cannot afford to
travel long-distance to seek legal enforceability of their rights."
• Cross default is another faulty clause where the HFC deems a borrower as a defaulter on
your home loan if he has made any kind of default in any other loan or facility with the
same HFC. "These are two different transactions and each one's performance or non-
performance should be measured independently
• The biggest twist in the loan agreement is in the amendment clause. This is a sample from a
Citibank home loan agreement: "The bank shall at its sole discretion alter the terms of this
agreement by written intimation sent to the borrower by courier. Any amendment proposed
by the borrower shall be valid only if made by a written agreement signed by both the
parties."
• If the consumer is a resident Indian, he cannot leave India for employment or business or
stay long-term outside India without fully repaying the loan. He cannot stay out of India for
any purpose for more than 60 days.
• According to the agreement, borrower cannot sell, exchange, partition, mortgage, charge,
encumber, lease or dispose the property till he has got ‘discharge’ from the bank in writing.
• If a consumer has taken a ‘home equity’ or a ‘top-up loan’ then he cannot let out the
property for use/occupation by another person without prior written permission from the
bank.
• It is not clear whether banks are bound by law to notify the borrower of changes in their
policy. But, the agreement binds the borrower to remain acquainted with a bank’s
rules/terms and conditions affecting or relating to the loan taken.
9 European Journal of Economics, Finance And Administrative Sciences - Issue 20 (2010)
2. Previous Research
One of the first articles dealing with consumer knowledge of installment credit rates was published by
Lewis Mandell (1971) who used data collected by the Survey Research Center at the University of
Michigan. He concluded that although awareness of true annual percentage rates charged on
automobile credit increased but, borrowers were still largely unaware of the rate they were paying.
Furthermore, he concluded that personal characteristics of borrowers made little difference in their
awareness of loan rates. George and Shay (1974) in his research on “Some Factors affecting awareness
of annual percentage rates in consumer installment credit transactions” concluded that “there were
significant gains in awareness of annual percentage rates of charge after the law, but a majority of
borrowers still remained unaware and continued to underestimate annual percentage rates of charge on
closed-end installment credit contracts. Jean Mann Due (1955) in his study has found that consumers
are having less knowledge in Installment Credit Charges. Sources of uncertainty, including future
interest rates, housing prices, and general economic conditions, are other factors in the mortgage
decision (Follain, 1990). A home is often the household’s largest consumer durable good as well as a
part of the investment portfolio. In some cases it is the household’s only significant asset and
represents a lifetime of savings (Johnson 1996)
3. Objectives of the Study
1 To identify the consumers’ awareness level on the home loan agreement
2 To identify the reasons for not reading the home loan agreement by the consumers.
3 To identify the preferred interest rate option.
4. Hypotheses
For studying the Consumer awarenesss on Home Loan agreement, we test the following hypotheses:
H1: There is no association between Home loan agreement read or not read with Demographic
factors of home loan borrowers.
H2: There is no association between Home loan agreement read or not read with Economic
factors
5. Research Method
Descriptive Research Design, has been used in this study. This study is pertaining to the home loan
buyers from the commercial banks in Tamilnadu. This study was conducted among the 300
respondents but 19 respondents response was inadequate. So, 281 respondents were finally selected.
Convenient sampling technique was employed to select the sample. Structured Questionnaire (Close
ended and open ended, Multiple choice questions, dichotomous questions and scales) was used in the
questionnaire. The data obtained were analyzed using statistical techniques viz., chi square and
Percentage analysis.
10 European Journal of Economics, Finance And Administrative Sciences - Issue 20 (2010)
6. Results and Discussion
Table 1: Distribution of investor by their demographic & Economic factors
S.No Home Loan buyers- particulars No. of Respondent in (%)
Age
Less than 30 5
30 – 40 47
41 – 50 31
1.
50 & Above 17
Gender
Male 79
2.
Female 21
Occupation
Professional 7
Private Employee 41
Self Employed 21
3
Government employee 31
Educational level
No formal education 10
Higher Secondary education 16
Undergraduate 36
Post-Graduate 31
4.
Professional 7
Nature of family
Joint 23
6.
Nuclear 77
Income per month
Less than Rs15000 10
Rs. 20000-30000 32
Rs. 30001-40000 28
Rs. 40001-50000 25
7.
Above Rs. 50000 5
Savings
Less than Rs. 10000 40
Rs.10000-20000 43
Rs. 20001-30000 12
8.
Above Rs. 30000 5
No. of persons earning in the family
Only one 36
Two 29
Three 25
9.
Four 10
Table No. 1 indicates that 47% of the respondents are in the age group of 30-40. This clearly
shows that people are going for home construction in their mid ages. 79% of the respondents are Males
and 41% of the respondents are private employees. 36% of the respondents are under graduates and
77% of the respondents are in the Nuclear family. When it comes to the monthly income and savings
32 % of the respondents are in the income category of Rs. 20000 – 30000 and 43% of the respondents
are saving Rs. 10000 – 20000 in a month. 36% of respondent’s family is having only one earning
member.
11 European Journal of Economics, Finance And Administrative Sciences - Issue 20 (2010)
Table 2: Purpose of the home loan
S.No. Purpose No. of Respondent (%)
1. Home construction 59
2. Land buying and Home construction 17
3. Home Improvement 8
4. Home extension 16
Table 2 indicates that 59% of the respondents are going for home loans only for home
construction. This might be due to less awareness of other types of home loans.
Table 3: nterest rate option
S.No. Interest rate No. of Respondent (%)
1. Floating 72
2. Fixed 28
Table 3 indicates that 72% of the respondents have opted for floating interest rate whereas 28%
of the respondents have opted for fixed interest rate.
Table 4: Name of the Bank in which home loan is availed
S.No. Name of the Bank No. of Respondent (%)
1. Public sector banks 56
2. Old generation Private Banks 28
3. New generation Private Banks 16
Table 4 indicates that 56% of the respondents have taken their loan in Public sector banks
namely SBI, Indian Bank, Indian Overseas Bank, Vijaya Bank etc.
Table 5: Tenure of the Home Loan
S.No. Tenure No. of Respondent (%)
1. 5 Years 7
2. 6-10 Years 16
3. 11-15 Years 24
4. 16-20 Years 53
Table 5 indicates that 53% of the respondents have opted for 16-20 years as the tenure of the
home loan followed by 24% of the respondents have opted for 11-15 years.
Table 6: No. of Banks approached
S.No. No. of Banks No. of Respondent (%)
1. One Bank only 35
2. 2-4 Banks 36
3. 5 and above Banks 29
Table 6 indicates that 36% of the respondents have approached 2-4 banks for their loan
followed by 35% of the respondents has approached only one bank.
12 European Journal of Economics, Finance And Administrative Sciences - Issue 20 (2010)
Table 7: Awareness on Home Loan Agreement
S.No Awareness on Various Clauses in Home loan Agreement No. of Respondent (%)
1. Reset clause on fixed rates 12
2. Force Majeure Clause 2
3. Defining a default 22
4. Direct disbursement to builders 9
5. Assignment to Third Parties 12
6 Other twisted clauses
Change in the borrower's employment 2
Processing fee 29
Cross Default 5
Amendment Clause 2
Employment clause 3
Table 7 indicates that respondents have poor awareness level on various home loan agreement
clauses viz. Reset clause, Force Majeure Clause, Defining a default, Direct disbursement to builders,
Assignment to Third Parties and Other twisted clauses. This may be because many respondents have
not reading the home loan agreement. And even if they read, it is just before they sign the agreement.
Table 8: Home Agreement Read or Not read
S.No Read / Not read No. of Respondents (in %)
1. Read 11
2. Not read 89
Table 8 indicates that 89% of the respondents have signed in the home loan agreement without
reading it.
Table 9: Reasons for not reading the Home Loan agreement
S.No Reasons No. of Respondent (%)
1. No opportunity was given 24
2. Did not ask for it 10
3. Did not know the importance of reading at that time 35
4. Fear of rejection of loan 31
Table 9 indicates that 35% of the respondents have not read the home loan agreement because
they did not know the importance of reading at that time and 31% of the respondents have not read
because of fear of rejection of the loan.
Table 10: Association between Home loan agreement read or not read with Demographic factors of home loan
borrowers
S.No. Profile of Variables Chi-Square value P - Value Result
1 Age 7.59 0.055 Not Significant
2 Gender 1.46 0.230 Not Significant
3 Occupation 10 0.019 Significant
4 Nature of family 4.45 0.035 Significant
5 Education 14.67 0.005 Significant
Table 10 indicates that Occupation, Nature of family and Education are significantly associated
with the Home loan agreement read or not read. There is no significant association between the Age
and Gender with the home loan agreement read or not read.
13 European Journal of Economics, Finance And Administrative Sciences - Issue 20 (2010)
Table 11: Association between Home loan agreement read or not read with Economic factors
S.No. Profile of Variables Chi-Square value P - Value Result
1 Monthly Income 6.55 0.16 Not Significant
2 Savings 28.85 0 Significant
Table 11 indicates that there is a significant association between the Savings and the Home loan
agreement read or not read whereas there is no significant association between the Monthly income and
the Home loan agreement read or not read.
Table 12: Association between reasons for not reading the home loan agreement with various factors
S.No. Profile of Variables Chi-Square value Table Value Result
1 Purpose of Home Loan 42.50 2.65 Not Significant
2 No. Banks approached 17.6 0.01 Significant
Table 12 indicates that there is a significant association between the Reasons for not reading the
home loan agreement and No. of Banks approached. There is no significant association between the
Reasons for not reading and Purpose of the Home loan.
Findings
• Majority of the respondents have opted for new home construction home loan
• Majority of the respondents have opted for floating interest rate
• Majority of the respondents have taken their loans in Public Sector Banks
• Majority of the respondents’ preferred tenure of the loan was 16 – 20 years.
• Majority of the respondents approached 2- 4 Banks for their loans
• Majority of the respondents have not aware about the various clauses on home loan agreement
• Majority of the respondents have not read the home loan agreement
• Majority of the respondents have not knew the importance of reading the home loan agreement at
the time of signing the agreement
• Occupation, Nature of family and Education are significantly associated with the Home loan
agreement read or not read.
• There is a significant association between the Savings and the Home loan agreement read or not
read
• There is a significant association between the Reasons for not reading the home loan agreement
and No. of Banks approached.
Conclusions
• Not knowing the importance of reading the various clauses, fear of rejection of the loan were the
main reasons for low awareness of the home loans agreement
• Floating interest rate is taken because respondents did not understand the concept of the two
types of interest rate viz., Floating and fixed interest rates.
• RBI for commercial banks and National Housing Bank for Housing Finance Companies should
take initiatives to make the consumer aware about the various clauses on home loan agreement.
14 European Journal of Economics, Finance And Administrative Sciences - Issue 20 (2010)
References
1] Bernanke, Ben S., and Mark Gertler. (1995). ‘Inside the Black Box: The Credit Channel of
Monetary Policy Transmission’, Journal of Economic Perspectives 9: 27–48.
2] Bridges, S., and R. Disney. (2004). ‘Use of Credit and Arrears on Debt among Low- Income
Families in the United Kingdom’, Fiscal Studies 25: 1–25.
3] Bruekner, Jan K. (1986). ‘The Down Payment Constraint and Housing Tenure Choice: A
Simplified Exposition’, Regional Science and Urban Economics, 16: 519-525.
4] George, G.C., Parker and Robert P. Shay. (1974) “Some Factors affecting awareness of annual
percentage rates in consumer installment credit transactions” The Journal of Finance, 29 (1):
217-225.
5] Lewis Mandell. (1971) “Consumer Perception of Incurred Interest Rates: An Empirical Test of
the Truth in Lending Law,” Journal of Finance, 26 (5): 1143-53.
Websites
• http://www.rupeetimes.com/article/home_loans/home_loan_agreement_an_important_aspect_of_
your_loan_1846_P2.html/20/10/09
• http://www.bankbazaar.com/guide/taking-a-home-loan-beware-of-these-facts/19/10/09
• http://www.rediff.com/money/2006/dec/19home.htm/15/10/09
• http://getahead.rediff.com/report/2009/may/18/is-your-home-loan-lender-cheating-
you.htm/22/10/09
• http://sify.com/finance/fullstory.php?a=jjsjARfijah&title=A_charges_checklist_for_your_home_l
oan_offer&tag=Bank%20Bazaar/18/10/09
• http://blog.apnapaisa.com/category/loans/home-loans/21/10/09
• http://economictimes.indiatimes.com/Personal-Finance/Loan-Centre/Home-
Loans/Analysis/Agreeing-to-the-Loan- Agreement/articleshow/ 4905184. cms/20/10/09
• http://www.thaindian.com/newsportal/business/home-loan-borrowers-face-higher-instalment-
payout-lead_10078444.html#ixzz0UdeSURX3/19/10/09
