Personal Finance: What Does a Consistently Low Repo Rate Mean for Different Borrowers? | News from Mumbai
Borrowers looking to take out a loan were pleasantly surprised when the Reserve Bank of India (RBI) announced that their repo and reverse rates would remain unchanged at 4% and 3.5%, respectively. The decision made at last month’s monetary policy review meeting means that interest rates are likely to remain unchanged for the months ahead, which is beneficial for both existing and new borrowers. The extent to which a borrower would benefit from this, of course, depends on other factors, including agreements that were signed prior to the loan approval. Let’s look at some of them.
Home loans, which are usually taken out over a longer period of time, lead to high interest outflows. A falling interest rate can have a significant impact on the total interest payment. Most lenders approve home loan applications with variable interest rates. In a circular passed by RBI in October 2019, it is mandatory to link all variable-rate loans to an external benchmark from the various benchmarks in the circular. Since most banks choose the repo rate as the benchmark for their loans, the continued decline in repo rates bodes well for borrowers as they will spend less money repaying their loans in equal monthly installments (EMI).
Existing home borrowers who applied for a fixed rate loan must continue to repay them at the same rate. However, borrowers with loans that are more than three years old must check to see if they have benefited from the reduced interest rate. To do this, they need to check the benchmark under which their loan was sanctioned. Those who had not tied their loans to an outside benchmark may still have to pay high lending rates. However, they can also ask their lenders to convert their loans to external benchmark-linked loans instead of nominal fees, or to reallocate their loans to other banks.
Car loans are usually taken out for five to seven years and are granted at a fixed interest rate. If you are looking for one now, you will get the loans financed at considerably low interest rates, which remain fixed over the entire term. Due to the fixed nature of the loan, borrowers benefit from low EMIs throughout the life of the loan. Those who have an existing loan can get away from the burden of higher interest rates by moving the loan to a different lender. However, one needs to check the details of the foreclosure fees on the loan prepayment. When foreclosure fees are very low and there is still plenty of time to pay back the loan, it makes sense to take advantage of another lender’s lower interest rate.
Personal loan rates are higher than other loans due to their unsecured nature. Finding personal loans at current interest rates means longer savings on interest payments, with an interest rate hike unlikely in the near future. However, personal borrowers need to be aware of their creditworthiness as it will affect the interest rates offered to them and whether the lenders charge interest based on a fixed or floating rate. However, those who already have a personal loan might get an unpleasant surprise if they applied for the loan at a fixed rate. Borrowers can request a change if they see a large difference between their loan rates and the current interest rates. Those who are in the first cycle of their loan repayment will benefit the most as these loans are only granted for three to five years and thus result in good savings. This is because a large part of the EMIs paid during the first half of the repayment period consists of the interest amount.
Personal Finance is a weekly feature designed to provide our readers with relevant and helpful financial information