With the RBI maintaining the status quo, banks will not hike interest rates on loans any time soon. Also, keeping in view the festivities, most of the lenders are offering special low rates and several other offers to the borrowers – home loans are being given at minimum interest rates of 6.5-6.7%. This gives borrowers one last window to avail one of the lowest rates on home, auto and personal loans before rates start rising again.
In its bi-monthly monetary policy review meeting on October 8, 2021, repo rate And the reverse rate remains at 4% and 3.35% respectively. This is the ninth consecutive monetary policy review meeting after the last change in May 2020 when the central bank decided not to change the rate. The current repo rate of 4% is the lowest rate since April 2001.
Here’s a look at how existing borrowers and new loan borrowers (be they) home Loan, car loan, or personal loan) can take advantage of RBI’s stay.
What should home loan borrowers do?
Rate of interest The most important factor that decides how much you pay for your borrowing is your loan. With home loans being the longest term loan for most borrowers, any change in the interest rate has a significant impact on the overall interest payment during the remaining tenure of the loan.
More time for new borrowers: Most home loans are given on a floating rate basis. RBI made it mandatory to link all floating rate retail loans from banks to an external benchmark such as the repo rate with effect from October 1, 2019. Most of the banks have used the repo rate as the benchmark for their home loans. With the repo rate at its lowest level in the last two decades, the continuation of the low interest rate regime bodes well for borrowers.
With no hike in the repo rate, a new borrower who is planning to take a home loan in the near future can still get a loan at the current low rates for some more time.
Also, as mentioned above, due to the ongoing festive season, many banks and housing finance companies have cut their home loan rates for a limited period.
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Existing borrowers should review and act: No change in the repo rate means that existing home loan borrowers will continue to pay their EMIs at the same interest rate. However, if your loan is more than 5 years old, it would be prudent for you to check the interest rate regime (ie, BPLR, Base Rate, MCLR or External Benchmark Rate (EBR)) under which your loan is currently running .
If you haven’t transferred your loan to an external benchmark linked loan, it is quite likely that you are paying a much higher rate of interest than what lenders are charging on the new external benchmark linked home loan. If you are paying a higher rate, you can ask your existing lender to convert your loan into an EBR linked loan, for which you may have to pay a nominal switching fee.
However, if your lender is not offering this facility or is charging an even higher rate on the EBR linked home loan, you may consider switching your loan to a new lender. Being a floating rate loan, there is no penalty for switching. This means that all you have to do is check the processing fee and charges of the new lender and compare it with the interest benefit you would get from the switch. If the net profit appears attractive then you can proceed. Experts suggest that borrowers should consider balance transfer when the interest rate reduction is 0.5% or more.
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car loan
maximum tenure of one auto loan Between 5 years to 7 years. Depending on whether you are planning to take a new loan or are an existing borrower, you can use this pause in the repo rate to your advantage.
New borrowers: Most of the car loans are still being financed on a fixed interest rate basis, that is, whatever interest rate you get at the time of availing the loan, will remain constant throughout the tenure of the loan. Hence, it becomes important when one takes a loan.
So, if you enter a lower interest rate point (like the current one), you can take advantage of lower EMI payments during the tenure of the loan, even when the bank increases its overall interest rate. For example, currently, you can get a car loan from SBI at a minimum rate of 7.20% p.a. or from HDFC Bank at a minimum rate of 7.05% p.a.
So, if you haven’t made up your mind yet on which car to buy, with the RBI capping rates, you now get some more time to come to your buying decision as banks will most likely not hike rates anytime soon. will do.
Existing borrower: If you took your loan when the rates were high, such as 2 years ago, and the current rate is very low, you may consider switching your loan to another lender. But before you do, check your loan agreement for foreclosure fees, which are typically levied on a fixed-rate loan. If the foreclosure fee is low and the benefit of getting a lower rate from another lender is high, you’ll need to calculate the net benefit of switching to the new lender.
personal loan
New borrowers should make use of the additional window: In the case of personal loans too, banks are unlikely to hike rates anytime soon. So, if you are planning to take a personal loan, make sure you keep your credit score with you so that you can check the best rate based on your credit score. The higher your credit score, the better your chances of getting a loan and that too at a good interest rate.
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Existing borrowers should look for cost savings: There is not much you can do if you are an existing personal loan borrower as personal loans are usually given in the form of a term loan with a fixed interest rate. However, if you are paying a very high rate, let’s say above 16%, then it makes sense for you to check the rates of other lenders to see if they are offering loans at lower rates and Then switch. Personal loans are usually for a shorter tenure, often 3-5 years, hence, a switch can result in substantial savings when you make it in the first half of the repayment tenure. This is because the principal component of your EMI is the interest amount in the first half of your repayment tenure, so any switch has a greater impact in the form of reduction in the interest amount.
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