Your best friend is getting his house furnished at a total cost of Rs. 10,00,000. The work is likely to take around six months to complete. His interior decorator proposed that he (your friend) could get a discount of 1% (Rs. 10,000/-) if he pays the full amount upfront rather than the normal practise of paying for the work as per the work’s progress. Your friend has approached you for advice.

In this scenario most of us would correctly advise him to forget about the discount. It is not a sound practise commercially to pay in advance for a promise of delivery that is so far in the future. By paying in advance you are completely under the power of the supplier and run the risk of loosing your advance amount completely or being forced to accept delays in delivery or accepting lower than acceptable quality. There is no leverage at all that you have on the supplier unlike a case where you pay on progress where at least the incentive of future progress payment can make the supplier toe the line.

Would your advice be any different if your friend was taking a loan to pay for the cost of furnishing? In fact that will make the advice even stronger because the risk that you are taking is now not your own money but money borrowed that you have to repay.

Given this I am constantly amazed at the number of people who will swallow a similar bait of a discount in price in lieu of full payment for an under construction property that may be delivered after a couple of years. Given the maze of local and state and central regulations and the number of permissions required at every stage even the most well intentioned builder cannot really promise a firm delivery date. In the opinion of most consumers, builders (of course like all classes there are exceptions) are not exactly known for keeping all their promises. So one would expect that hardly any consumer would opt for the “Pay in full now and get attractive discount with delivery after 3 years” scheme.

Not really! Consumers opt of this because one - these schemes are attractively packaged and many times builders have tie-up with specific Bank under which you pay your down payment (say 15-20% of the total cost) and the balance amount is disbursed by the bank immediately to the builder as your home loan.

The options are:

• The EMIs can begin immediately. The consumer may be led to believe that he will get tax benefits on the EMI but he does not know that you cannot get tax benefits on such EMIs. Tax benefit on repayment of principal and interest on a loan taken to buy a house is eligible for tax benefit only from the year in which the construction is complete. For any year if the house remains under construction as on March 31, no tax benefit is available in that year notwithstanding the fact that you might have begun repayment of the loan through an EMI.

• The builder promises to fully or partially pay the EMIs till the construction is complete. But remember this is an arrangement between you and the builder only and it does not involve the bank. The liability to pay the EMI to the bank remains yours and if for any reason the builder stops paying the EMI, your liability to pay the bank remain as it is. If you refuse to pay the EMIs to the bank if the builder stops paying his share, your credit history will be damaged in the Credit bureau.

In both the cases effectively, you are taking a loan to pay off the builder in advance. In my opinion no amount of discount can justify your taking such an open-ended risk.

So should you not buy an under construction property?

It is always preferable to buy ready to move in property but that is not always possible. You may not have good properties with all the facilities that you require available on a ready to move basis. Or a delayed delivery schedule may actually suit your requirements in many cases.

You can minimise the risk while buying under construction property by doing the following:

1. Look at the full cost of under-construction property by figuring out the Value added Tax, Service tax and works contract tax liability, if any.
2. Always opt for construction linked payment scheme.
3. Choose only under construction projects pre-approved by at least couple of banks as this indicates that the legal title of the property including building plans has been vetted by these banks and found to be satisfactory. Also choosing one of those banks will smoothen your disbursement formalities. However, even in these cases, the risk of delayed construction remains yours in spite of the project being approved by the bank. Your liability to pay Pre-EMI interest and/or EMI on the disbursed loan amount remains even if there is delay in construction in this bank “pre-approved” project.

Incidentally an innovative scheme needs mention here under which Nahar Builders in Mumbai have tied-up with HDFC Ltd. wherein the customers pay 20% of the property value upfront and the balance 80% is disbursed by HDFC to the builder only on possession being handed over to the consumer. So here by paying 20%, the customer is able to book the property and the liability for the balance 80% commences only on possession. Unfortunately I am not aware of such a scheme being replicated anywhere else.

Many of my friends have disagreed with my opinion in this matter and I would be eager to receive feedback from readers on this issue.

Things have been happening so suddenly. It was a while before I realized I am almost stuck in a trap (or at least to me it seemed to be so). I am not much of a savings person. I use my credit card a lot.

The only saving grace seems to be that I have taken no loans and I have no liability.
Otherwise I’d be stuck in a debt trap. With no way to know how to get myself out of it. Let’s just say that I am one of the “lucky” ones. What about those who are not so lucky? What can they do when in a debt trap?

One option is to go to a financial advisor or consultant. But, they can be expensive.
The better solution is to approach a credit counseling center. There are several credit counseling centers in cities across India.

Some banks also have own credit counseling centers too, such as the Bank of India-sponsored Abhay, at Dadar in Mumbai. This agency, the first of its kind, also has centers in Gumla (Jharkhand), Wardha, and Chennai.

ICICI Bank’s credit counseling centre, Disha has centers at Ahmedabad, Hyderabad, Vijayawada, Kanpur, Delhi, Chennai, and Kolkata.

These centers will help you chart out a plan to repay your debts. You can swap your high cost borrowings for low cost debt. Interest rates may be bought down to as low as 18 per cent for levels such as 36 per cent in some cases.

These centers can also help you restructure the loan portfolios and formulate repayment plans. They may also help borrowers negotiate with banks for restructuring debts.

Here are the addresses:

• Abhay (Bank of India), 61 A, Sadanand, 1st Floor, Above Bank of India Branch, Gokhale Road (north), Dadar (West), Mumbai- 4000 028. Call 022-24221843.
• Disha (ICICI Bank), Prince Apartments, Ground Floor, Karani Lane, Ghatkopar (West), Mumbai 4000 028. Call 65971815/86/87. Visit www.dishfc.org
• Union Mitra (Union Bank of India), Union Bank Bhavan, 239, Vidhan Bhavan Marg, Nariman Point, Mumbai- 400021. Call 022-22896502.