Loan interest rate: the RBI holds the repo rate; What This Means For Home Loan, Auto And Personal Loan Borrowers, And What Should They Do Now



The Reserve Bank of India (RBI) once again maintaining the status quo on key rates, borrowers can enjoy low interest rates on loans for some time yet. At its bimonthly Monetary Policy Review meeting on August 6, 2021, the RBI announced that it was once again keeping its policy rates unchanged. The repo rate and the repo rate remain at 4% and 3.35% respectively.

This is the eighth consecutive time that the RBI has maintained the status quo on rates; the last reduction in the repo rate was in May 2020. The reverse repo rate of 4% is the lowest since April 2001.

With the RBI maintaining the status quo, banks are unlikely to raise interest rates on loans anytime soon.

Here’s a look at how existing borrowers and those looking to take on a new loan (whether it’s a home loan, car loan, or personal loan) can take advantage of the RBI break. .

What should mortgage borrowers do?

The interest rate is the most critical factor that determines how much you pay for your loan, i.e. your loan. With home loans being the longest term loans for most borrowers, any change in interest rates has a huge impact on the overall interest payment over the remaining term of the loan.

More time for new borrowers: Most home loans are granted at variable rates. The RBI had made it mandatory since October 1, 2019 that all variable rate retail loans from banks be linked to an external benchmark such as the repo rate. Most banks have used the repo rate as a benchmark for their mortgage loans. With the repo rate at its lowest level in the past two decades, the continued low interest rate regime bodes well for borrowers.

In the absence of a hike in the repo rate, a new borrower who plans to take out a home loan in the near future may still get loans at low rates going for some time yet.

Read also: Home loan linked to the repo rate: Here are the interest rates for home loans linked to the repo rate

Existing borrowers should consider and take action: No change in the repo rate means that existing mortgage borrowers will continue to pay their IMEs at the same interest rate. However, if your loan is over 5 years old, then it will be a good idea to check the interest rate regime (i.e.BPLR, Base Rate, MCLR, or External Benchmark Rate (EBR)) under which your loan was sanctioned.

If you haven’t transferred your loan to a loan linked to an external referral, chances are you will pay a much higher interest rate than what lenders charge on the new mortgage linked to an external referral. If you pay a higher rate, you can ask your existing lender to convert your loan to an EBR linked loan for which you may have to pay a nominal conversion fee.

However, if your lender does not offer this facility or charges a higher rate even on an EBR linked home loan, you may consider transferring your loan to a new lender. Being a variable rate loan, there is no penalty for switching. This means that the only factor you need to check is the processing fees and the new lender’s fees and compare them with the interest benefit you would get from the change. If the bottom line looks good to you, you can take action. Experts suggest that borrowers should consider balance transfer when the interest rate reduction is 0.5% or more.

Read also: Home loan linked to the repo rate: Here are the interest rates for home loans linked to the repo rate

Auto loans

The maximum term of an auto loan varies between 5 and 7 years. Depending on whether you are planning to take a new loan or whether you are an existing borrower, you can use this break in the repo rate to your advantage.

New borrowers: Most car loans are always funded on a fixed interest rate basis, i.e. the interest rate you get when you get the loan will stay fixed for the entire term. of the loan. Hence, when one takes the loan becomes critical.

So, if you enter at a low interest rate (like currently), you can enjoy lower EMI payments throughout the life of the loan, even when the bank raises its overall interest rate. For example, 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% per annum.

So, if you haven’t yet decided which car to buy, with the RBI’s break on rates, you now have more time to make your buying decision, as the banks are unlikely to raise rates. so early.

Existing borrowers: If you took out your loan when the rates were higher, say 2 years ago, and find that the current rate is much lower, you may consider transferring your loan to another lender. But before you do that, check your loan agreement for foreclosure fees that are typically charged on a fixed rate loan. If the foreclosure fees are low and the benefit of getting a lower rate from another lender is greater, then you will need to calculate the net benefit of moving to a new lender.

Personal loan

New borrowers should use an additional window: In the case of personal loans, too, banks are unlikely to increase their rates anytime soon. So, if you are considering taking out a personal loan, be sure to 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.

Also Read: A 50 Point Increase In Your Credit Score Can Save You So Much On Loan Interest Payment

Also Read: How To Maintain An Optimal Credit Score

Existing borrowers should look for cost savings: If you are already a personal loan borrower, there is little that you can do because a personal loan is usually given in the form of a term loan with a fixed interest rate. However, if you are paying a much higher rate, 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 generally for shorter terms, often 3 to 5 years, therefore a change can result in good savings when you make it in the first half of the repayment period. This is because in the first half of your repayment term, the main element of your EMI is the interest amount, so any change has a bigger impact in the form of a reduction in the interest amount.

Read also: Personal loan interest rates 2021: Comparison of the best bank personal loan rates



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