With RBI maintaining status quo, banks most likely will not increase interest rates on loans any time soon.
Here is a look at how existing borrowers and those looking to take a new loan (be it home loan, car loan, or personal loan) can take advantage of RBI’s pause.
How home loan borrowers will benefit
The interest rate is the most critical factor which decides how much you pay for your borrowing, i.e., your loan. And home loans, for most borrowers, are the longest tenure loans. Hence, any change in interest rate has considerable impact on the overall interest payment during the remaining tenure of the loan.
New borrowers get more time to access low rates: Most of the home loans are given on floating rate basis. RBI had made it mandatory since October 1, 2019, for all floating rate retail loans from banks to be linked to an external benchmark like the repo rate. Most banks have used the repo rate as the benchmark for their loans. With repo rate being at the lowest level seen in the last two decades, a continuation of this low interest rate regime works well for borrowers.
With no hike in repo rate, new borrowers who are planning to take a home loan in near future will get more time for their home buying process and still can get loans at prevailing low rates.
Old borrowers should review and act: No change in the repo rate means that existing home loan borrowers will continue paying their EMIs at the same interest rate. However, if your loan is more than 5 years old, then it will make sense for you to check the interest rate regime (i.e., BPLR, Base Rate, MCLR or External Benchmark Rate (EBR)) under which your loan has been sanctioned.
If you have not shifted your loan to an external benchmark linked loan, then it is quite likely that you may be paying a much higher interest rate than what is being charged by lenders on the new external benchmark linked home loan. In case you are paying a higher rate you may ask your existing lender to switch your loan to a loan linked to EBR for which you may have to pay a nominal switching fee.
However, if your lender is not offering this facility or is charging a higher rate even on an EBR linked home loan, then you may consider switching your loan to a new lender. Being a floating rate loan there is no penalty for switching. This means the only factor that you have to check is the processing fee and charges of the new lender and compare it with the interest advantage that you would get from the switch. If the net benefit appears attractive you can make move. Experts suggest that borrowers should consider balance transfer when the interest rate reduction is 0.5% or more.
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The maximum tenure of an auto loan ranges between 5 years and 7 years. Depending upon whether you are planning on taking a new loan or are an existing borrower, you can utilise this pause in the repo rate to your advantage.
New borrowers: Most of the car loans in India are still being financed on a fixed interest rate basis, i.e., whatever interest rate that you get at the time of getting the loan, will remain fixed during the entire tenure of the loan. Therefore, when one takes the loan becomes critical.
So, if you enter at a low interest rate point (like at present), you can enjoy the advantage of lower EMI payments throughout the tenure of the loan even when the bank increases its overall interest rate. For instance, currently, you can get a car loan from SBI at their lowest rate of 7.75% per annum or from HDFC Bank at their lowest rate of 7.95% a year.
So, if you are yet to make up your mind about which car to buy, with the RBI’s pause on rates, you now get some more time to come to your purchase decision as banks mostly likely will not hike rates any time soon.
Existing borrowers: If got your loan when rates were on the higher side, say 2 years ago, and find the current rate to be much lower, then you can consider switching your loan to a different lender. But before you do that, do check your loan agreement to find about the foreclosure charge which is typically charged on a fixed rate loan. If the foreclosure charge is low and the advantage of getting a lower rate from another lender is higher, then you will need to calculate the net benefit.
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New borrowers should utilize extra window: If you were planning to take a new loan you will have more time to do so at the prevailing lower rate as lenders are unlikely to hike rates in the near term. Before you finalise the lender, make sure you have your credit score with you so that you can check the best rate based on your credit score.
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Existing borrowers should look for cost saving: If you are an existing personal loan borrower then there is not much you can do as a personal loan is given typically in the form of a term loan with fixed rate of interest. However, if you are paying a much higher rate, let us say above 16%, then it would make sense for you to check the rates of other lenders to see if they are offering loans at lower rates and then make the switch. Personal loans are typically for shorter tenures, often 3-5 years, therefore, a switch can result in good savings when you do it in the first half of your repayment. This is because in the first half of your repayment tenure the major component in your EMI is interest amount, so any switch has a higher impact in the form of interest amount reduction.
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