Composite Loan: Features, Benefits, and Considerations

March 23, 2023


Composite loans have become a popular option for homebuyers in India looking to purchase a property. These loans combine the benefits of a home loan and a personal loan, allowing borrowers to finance their entire property purchase, including ancillary expenses such as registration fees, stamp duty, and other charges. This type of loan can be especially helpful for first-time home buyers or those purchasing a property for investment purposes, as it provides greater flexibility and ease of access to funding. In this blog, we will get down to the details of a plot construction composite loan in India.

Top Banks for Composite Loan in India

Bank Name Interest Rate Loan Amount Tenure Processing Fee Fees / Charges
State Bank of India 8.70% Rs. 50,000 – Rs. 15 crore Up to 30 years 0.40% of loan amount + GST Nil prepayment charges for floating-rate loans
HDFC Bank 8.60% Up to Rs. 75 lahks Up to 20 years Up to 1.50% of loan amount + GST Nil prepayment charges for floating-rate loans
ICICI Bank 7.85% Up to Rs. 10 crore Up to 30 years Up to 0.50% of loan amount + GST Nil prepayment charges for floating-rate loans
Axis Bank 7.75% – 8.55% Up to Rs. 5 crore Up to 25 years Up to 1.00% of loan amount + GST Nil prepayment charges for floating-rate loans
Punjab National Bank 8.45% – 9.95% Up to Rs. 10 crore Up to 30 years Up to 0.50% of loan amount + GST Nil prepayment charges for floating-rate loans
Bank of Baroda 7.50% – 9.50% Up to Rs. 1 crore 3 to 10 years Up to 0.50% of loan amount + GST Nil prepayment charges for floating-rate loans
Canara Bank 7.95% – 9.95% Up to Rs. 10 crore Up to 30 years Up to 0.50% of loan amount + GST Nil prepayment charges for floating-rate loans
Union Bank of India 7.50% – 8.95% Up to Rs. 10 crore Up to 30 years Up to 0.50% of loan amount + GST Nil prepayment charges for floating-rate loans
IDBI Bank 8.10% – 8.80% Up to Rs. 10 crore Up to 30 years Up to 1.00% of loan amount + GST Nil prepayment charges for floating-rate loans
Central Bank of India 7.45% – 9.00% Up to Rs. 10 crore Up to 30 years Up to 0.50% of loan amount + GST Nil prepayment charges for floating-rate loans

What is a Composite Loan?

A composite loan is a type of loan that combines multiple types of loans into a single loan. This means that instead of having several loans for different purposes, you can have one loan that covers all your needs. For example, if you want to purchase a plot and construct a house, you might need to take out a home loan and a construction loan separately. With a composite loan, you can combine these two loans, simplifying your repayments and reducing your overall interest rate.

How Does it Work?

A composite loan involves a combination of multiple loans that can cater to varying needs in single borrowing. The various loans that can be clubbed together include a personal loan, a car loan, or a home loan. Additionally, the interest rate offered will be averaged out of both schemes. This means the Composite Loan interest rate will be common for the entire loan. Furthermore, the following aspects come into play as well.

  • One Repayment Schedule: Instead of making separate payments on each individual loan, you make a single repayment on the composite loan, which includes all of the loans that are bundled together.
  • Easier to Manage: A composite loan can be easier to manage because you only have to make one payment each month instead of several.
  • Lower Interest Rate: Depending on the individual loans that make up the composite loan, you may be able to secure a lower interest rate than you would if you took out each loan separately.
  • Longer Repayment Period: In some cases, a composite loan may have a longer repayment period than the individual loans that make it up, which can make it more affordable to repay.

How to Compare Composite Loan from Different Lenders

Comparing composite loans from different lenders can be a complex process as each lender may have different terms, interest rates, fees, and other factors that can impact the overall cost of the loan. Here are some steps you can follow to compare composite loans from different lenders:

  • Check the interest rate
  • Compare the fees
  • Consider the loan term
  • Check the loan-to-value ratio (LTV)
  • Look for prepayment penalties
  • Check for additional features such as interest rate locks or rate float-downs, which can impact the overall cost of the loan.

Benefits of a Composite Loan for Home Buyers

Some benefits of a composite loan, also known as a combination loan or a split loan, for home buyers are explored below.

  • Flexibility: A composite loan offers flexibility in terms of repayment options. You can choose to pay off the variable-rate portion of the loan faster if interest rates go up or focus on paying down the fixed-rate portion if you want more stability.
  • Lower interest rates: A composite loan may offer lower interest rates compared to taking out two separate loans, as the lender may offer a lower rate for the combined loan.
  • Manageable repayments: With a composite loan, you can have the stability of a fixed-rate loan while still taking advantage of lower variable rates. This can help make repayments more manageable, especially if interest rates rise.
  • Tax benefits: In some cases, the interest paid on both portions of a composite loan may be tax-deductible, which can help reduce your overall tax bill.
  • Convenience: A composite loan can be more convenient as you only have one loan to manage rather than two separate loans. This can make it easier to keep track of your repayments and stay on top of your finances.

Composite Loan Eligibility

The eligibility criteria for a composite loan can vary depending on the lender and the specific loan product. Generally, lenders will look at the borrower’s credit history, financial stability, and ability to repay the loan.

Some common eligibility requirements for composite loans are:

  • Borrowers must have a good credit history and CIBIL score.
  • Loan applicants should be able to produce their income and financial information so that the bank can assess whether or not the customer can repay their loan.
  • Lenders may require collateral, such as property or equipment, to secure the loan.
  • If the borrower has a poor credit score or limited collateral, lenders may require a guarantor who can pledge assets or co-sign the loan agreement.

Documents Required for Composite Loan

Composite loan are popular among homebuyers who want to avoid the hassle of managing multiple loans. However, to procure them, applicants will have to submit certain documents along with their application.

Here are the documents required for composite loans for home buyers:

  • Income proof
  • Identity proof
  • Property documents
  • Property valuation report
  • NOC from builder/society
  • NOC from the bank
  • Loan application form
  • Passport-sized Photograph
  • Other documents depend on the lender’s requirements such as a power of attorney, insurance policy, etc.

Navigating the Process of Applying for a Composite Loan

Here are the steps home buyers can take to apply for a composite loan:

Research Lenders

Look for lenders that offer composite loans and compare their rates, terms, and fees. You can also consult with the above list for the best banks to look out for composite loans in 2023.

Determine Eligibility

Check if you meet the lender’s eligibility requirements, which typically include a good credit score, stable income, and a down payment.

Gather Documents

Prepare the necessary documents such as proof of income, tax returns, bank statements, and any other required documents that the lender may request.

Complete the Application

Fill out the application form and provide accurate information about yourself, the property you’re buying, and the loans you want to combine.

Wait for Approval

After submitting your application, the lender will review your information and determine whether you’re eligible for the loan.

Close the loan

If you’re approved for the composite loan, the lender will provide you with a closing disclosure, which details the loan terms, fees, and other important information. Review the disclosure carefully, and if everything is satisfactory, sign the loan documents and close the loan.

Remember, a composite loan can be a good option for homebuyers who want to combine different types of loans to save money on interest and fees, but it’s important to do your research and shop around for the best rates and terms.

Common Misconceptions About Composite Loans

Composite loans are a viable option for homebuyers who want flexibility, affordability, and convenience. However, certain common misconceptions may obstruct one from considering that a reasonable option. By knowing these misconceptions, one can make an informed decision about whether a composite loan is right for them or not.

  • Composite loans are not only for high-income earners. They can be availed of by anyone meeting the basic eligibility requirements.
  • Composite loans are not only for new home purchases: Composite loans can be used for new home purchases and refinancing existing housing loans.
  • Composite loans are not more complicated than traditional loans.
  • Composite loans are not more expensive. Composite loans may have higher upfront costs, such as application fees or appraisal fees, but they can actually save you money in the long run.
  • Composite loans are not only for people with perfect credit.

How to Avoid Misconceptions?

Here are some ways to avoid these misconceptions:

  • Do your research to gain a complete understanding of how composite loans work.
  • Consider your financial situation before applying for a composite loan. Evaluate your financial situation and determine if a composite loan is the right choice for you.
  • Work with a trusted lender.
  • Read and understand the loan documents carefully, and ask your lender to explain any terms or concepts that you are not familiar with.
  • Don’t rely solely on interest rates. Other factors, such as the length of the loan, the type of loan, and the fees, can also impact the overall cost of the loan.

Advantages and Disadvantages of Including a Home Loan in a Composite Loan

Including a home loan in a composite loan have both advantages and disadvantages, outlined below.

Lower interest rate Composite loans typically have lower interest rates than individual loans, which can result in significant savings over the life of the loan.
Simplified payment With a composite loan, you only have to make one monthly payment instead of multiple payments on different loans. This can make managing your finances easier and more convenient.
Flexibility A composite loan can be tailored to meet your specific needs. You can choose the loan amount, interest rate, and repayment term that work best for you.
Risk of losing your home If you include a home loan in a composite loan and you are unable to make your payments, you risk losing your home. This is because the home loan is secured by your property.
Longer repayment period A composite loan typically has a longer repayment period than an individual loan.
Higher fees Some lenders may charge higher fees for a composite loan. This can increase the overall cost of the loan.

Real-life Examples of Composite Loans in Action

Here are some real-life examples of composite loans for home buyers in India:

  • A homebuyer in India may take out a composite loan that combines a home loan and a personal loan. This loan can help the borrower with their down payment or other expenses related to the purchase of the property. The borrower may take a personal loan for a smaller amount and repay it over a shorter term than the home loan.
  • In this type of composite loan, a homebuyer can combine a home loan with a loan against property to meet their funding requirements. The borrower can take out a loan against their existing property or a property they plan to buy in the future.
  • A homebuyer may take out a composite loan that combines a home loan and a construction loan. The borrower can use the home loan to purchase the property and the construction loan to fund the construction of the house.

Tips for Managing Payments on a Composite Loan

Managing payments on a composite loan can be challenging, as it involves making payments towards both the principal amount and the interest. Here are some tips to help you manage payments on a composite loan:

Understand the Loan Terms

Before taking out a composite loan, it is important to understand the terms and conditions of the loan. This includes the interest rate, the repayment schedule, and any fees associated with the loan.

Create a Budget

Create a budget that takes into account your monthly loan payments, as well as other expenses. This will help ensure you have enough money to make your loan payments on time.

Automate your Payments

Set up automatic payments for your composite loan. This will help you avoid missing payments and incurring late fees.

Make Extra Payments

If possible, make extra payments towards your composite loan. This can help you pay off the loan faster and save money on interest charges.

Communicate with your Lender

If you are having trouble making your loan payments, communicate with your lender. They may be able to work with you to find a solution, such as restructuring the loan or providing a temporary forbearance.

Stay Organised

Keep track of your loan payments and statements. This will help you ensure that your payments are being applied correctly and that you are not being charged any fees or penalties you are unaware of.

Pay on Time

Always make your loan payments on time. Late payments can result in fees and damage your credit score.

What to Consider Before Refinancing a Composite Loan?

Refinancing may be a good option if you have financial goals such as paying off debt, reducing your monthly payments, or lowering your interest rate. However, there are several more factors that you should consider to ensure that you are making the right decision for your financial situation. Here are some things to remember:

  • The interest rate: The main reason to refinance is to lower your interest rate. Be sure to shop around and compare rates from different lenders to ensure you get a lower rate than your current composite loan.
  • Fees and charges: Refinancing may come with fees and charges such as application fees, appraisal fees, and closing costs. Be sure to factor in these costs to make sure that the savings you will receive from refinancing will outweigh the costs.
  • Repayment term: Extending your repayment term may lower your monthly payments, but it will also increase the amount of interest you pay over the life of the loan. Make sure to weigh the benefits of lower monthly payments against the long-term cost of the loan.
  • Credit score: Lenders consider credit scores when determining interest rates. Refinancing may result in a lower interest rate if your credit score has improved since you first took out your composite loan.
  • Loan type: Refinancing to a fixed-rate loan may offer more stability and predictability in your monthly payments if you have a variable-rate composite loan.

By considering these factors, you can decide whether refinancing your composite loan is the right move for you.

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Frequently Asked Questions

What factors can affect a Composite Loan's interest rate?

The interest rate on a Composite Loan can be affected by various factors, including but not limited to the borrower's creditworthiness, the loan amount and term, prevailing market rates, and the type of collateral provided. Additionally, economic conditions and regulatory policies can also impact the interest rate.

Can I prepay a Composite Loan, and are there any charges for doing so?

Yes, you can prepay a composite loan, but it is important to check with your lender about any specific terms and conditions related to prepayment. Some lenders may charge a prepayment penalty or fee, so it's important to clarify this before making any prepayments.

What is the repayment period for a Composite Loan, and can it be extended?

A Composite Loan typically has a repayment period of several years, depending on the terms of the loan agreement. The repayment period may be extended, subject to the lender's approval and the borrower's ability to meet the new terms and conditions.

What are the consequences of defaulting on a Composite Loan, and how can I avoid them?

Not only can defaulting on a composite loan have legal consequences, but it can also hamper a borrower’s creditworthiness and incur penalties. To avoid them, it is prudent that one should not miss out on any loan payments.

Vimal Vijayan is a major in Philosophy with a background in Music, Artistry, Research, and Teaching. More often than not, he is as confused as a cow on an astroturf but oddly that's just his strategy for staying lazy. Also, he likes to play Chess. Fin.

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