Personal Finance: What Does a Low, Constant Repo Rate Mean to Various Borrowers? | Bombay News
Loan-inclined borrowers were pleasantly surprised when the Reserve Bank of India (RBI) announced that its repo and repayment rates would remain unchanged at 4% and 3.5%, respectively. The decision, taken at the monetary policy review meeting last month, means that interest rates are expected to remain stable in the coming months, which is a boon for borrowers, whether existing or not. new. Of course, the extent to which a borrower would benefit depends on other factors, including agreements signed prior to loan approval. Let’s take a look at some of them.
Mortgage loans, generally taken out over an extended period, generate significant interest payments. A drop in interest rates can have a dramatic impact on the total interest paid. Most lenders approve mortgage applications billed on floating interest rates. In a circular adopted by the RBI in October 2019, it is mandatory to link all variable rate loans to an external benchmark among the several benchmarks included in the circular. With most banks choosing the repo rate as the benchmark for their loans, the continued decline in repo rates is a good sign for borrowers, as they will spend less money to repay their loans in Equivalent Monthly Installments (EMI).
Existing mortgage borrowers who applied for fixed interest rate loans must continue to repay them at the same rate. However, borrowers with loans of more than three years should check whether they have benefited from the reduced interest rate. For this, they must check the benchmark under which their loan was sanctioned. Those who had not linked their loans to any external reference may have to continue paying high interest on the loans. However, they can also ask their lenders to convert their loans to external benchmark linked loans instead of nominal fees or to transfer their loans to other banks.
Auto loans are generally taken out for a term of five to seven years and are approved on the basis of a fixed interest rate. Seeking one now means getting the loans financed at very low interest rates which will remain fixed for the duration of the tenure. Borrowers will benefit from low IMEs throughout the life of the loan due to the fixed nature of the loan. Those with an existing loan can escape the burden of paying more interest by transferring the loan to another lender. However, one should check the details regarding the foreclosure fees regarding the prepayment of the loan. If the foreclosure fee is considerably low and there is plenty of time left for the loan repayment, it makes sense to take advantage of the lower rate charged by another lender.
The rates for personal loans are higher than other loans due to their unsecured nature. Finding personal loans now at current interest rates means extended savings on interest payments with an unlikely interest rate hike in the short term. However, personal loan borrowers should be aware of their credit rating as it has an effect on the interest rates offered to them and whether lenders charge interest on a fixed or variable interest rate basis. Those who already have personal loans, however, may have an unpleasant surprise if they had applied for the loan on a fixed interest rate basis. Borrowers can request a change if they see a huge difference between their loan rates and current interest rates. Those who are in the first repayment cycle of their loan will benefit the most, as these loans are only allowed for three to five years, giving them good savings. This is because a large portion of the IMEs paid during the first half of the repayment period consists of the amount of interest.
Personal Finance is a weekly column that aims to provide our readers with relevant and useful financial information.