State Bank of India (SBI) recently announced an increase in loan interest rates, adding to borrowers' burden. As per the bank’s site, the marginal cost of lending rate (MCLR) for one month and three months has been raised from 7.60 percent to 7.75 percent; the MCLR for six months and one year has been raised from 7.90 percent to 8.05 percent; the MCLR for three years has been raised from 8.15 percent to 8.25 percent, and the MCLR for three years has been raised from 8.25 percent to 8.35 percent.
This is not the first time that SBI has increased its interest rates on all kinds of loans including those meant for buying homes or cars or for personal or business use. Banks have acted in response to the Reserve Bank of India's (RBI) decision to raise repo rate, passing on the additional interest burden to their borrowers.
However, repaying loans is not difficult if you adhere to the following steps.
Every time you are unable to pay your equated monthly instalments (EMIs) or seek additional loan tenure, you end up paying extra through fees or penalties to the lending organisation. Hence, one should ensure continued and timely repayment of the loan amount through EMIs.
Adhil Shetty, CEO, BankBazaar.com, says, “Home loan balance transfers usually attract a processing fee of one percent, payable to the new bank. This is important to note as this may overshadow the savings you may incur if you transferred the loan, depending on the loan amount. However, the processing fee varies from bank to bank and is not fixed at one per cent. You may even be able to waive it entirely. Nevertheless, you need to calculate the exact change in your outflows before you refinance your loan.”
Shetty adds, “As a thumb rule, the difference should at least be a minimum of 0.5 percent from the existing rate for good savings post-processing fees and other charges. In the case of base rate or BPLR loans, this difference can be as much as three percent. This is a sizable interest to prompt a switch, even if you are at the tail end of your loan.”
Repay in small chunks
Consider repaying your loan in small chunks other than the regular EMIs. This type of prepayment will lessen the burden of the principal loan amount, thus, reducing the loan tenure too in the long run. A small loan tenure translates to less interest payment. You then benefit from paying less towards the interest component of your loan.
Increasing EMIs against the loans
You need not limit yourself to repaying the EMI amounts alone. You must try to repay more through regular EMIs, thus, lessening the burden of the loan in the long run.
Akhil Rathi, VP- Financial Concierge, 1finance.co.in, says, “An effective monthly plan calls for discipline, with a sizable income chunk allocated to EMI/investment, savings, and rest for expenses. Decide where you are spending your money and whether it is necessary if your expenditure is higher. You'll save more money if you reduce your spending. Increasing the EMI is one of the best strategies to lower the debt load, but this can only be done when there is more cash flow because of an increase in income from work or other sources, or a decrease in expenses. In my opinion, a rise in EMI is appropriate if your regular income is rising and there are no significant expenses anticipated in the near future.”
“There’s a substantial increase in cost in just this year – at the start of the year individuals were paying 6.8-7 percent on their home loans. That’s now heading to 8.4 percent. If you consider a home loan with an outstanding principal of ₹30 lakh and a 20-year residual maturity, the tenure goes up by almost 15 years if the EMI doesn’t go up (184 months). So, it is a given that the EMIs are going to rise at some point soon.
o ~17x your EMI would bring your tenor back to what it was before the 1.9 percent increase
o Five percent of the loan balance once a year pays off a 20-year loan in 12 years
o If rate approaches double digits, pre-pay aggressively," explained Shetty.
Conduct proper research
A lot of research must be carried out before deciding to buy any property, irrespective of whether you buy it to live in or add it to your investment portfolio. Atul Monga, Chief Executive Officer, Basic Home Loan, says, “Loan interest rates depend on a variety of factors, including the type of loan, the borrower's creditworthiness and the lender’s current portfolio. Location and prices are just two of many factors that can influence loan interest rates.”
Adding how myriad factors affect home loan interest charges charged by lenders, Monga added, “Borrowers should research recent trends and analyse projects based on their location and prices before taking out a loan. This is because these properties will likely appreciate, giving the lender a better chance of recouping their investment if the borrower defaults on the loan. For example, loans in inner city areas may be considered higher risk than loans in rural areas, and as such, may have higher interest rates. Prices can also impact loan interest rates. When prices are rising, lenders may be more likely to offer loans with higher interest rates because they want to protect their investments. However, when prices are falling, lenders may be more willing to offer loans with lower interest rates to encourage borrowing.”
Compare loans before borrowing
It feels good to be able to invest in a property. Better, if you exercise your understanding of personal finance to compare the interest rates charged by banks or other lending organisations. Even a 0.5-1 percent lower interest rate can make a huge difference when you consider the interest amount paid in its entirety.
For example, if you take a ₹25 lakh home loan at an 8.40 percent interest rate, the total interest would amount to ₹26,69,027, thus, taking the loan amount payable to ₹51,69,027.
Now compare this to a similar loan repayment at a 7.40 percent interest rate. The total interest would amount to ₹22,96,935. The total amount payable would be ₹47,96,935.
This small comparison highlights the importance of comparing interest rates charged by different lenders and then selecting the one that allows you to repay the loan at reasonable interest rates.