Personal Finance: What does a consistent low repo rate mean for various loan borrowers?

Reserve Bank of India (RBI) announced that its repo and reverse rates would remain unchanged at 4% and 3.5%, respectively. The decision means that interest rates are likely to remain static in the coming months, which is an advantage to borrowers.

Borrowers inclined to take a loan were in for a pleasant surprise as the Reserve Bank of India (RBI) announced that its repo and reverse 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 likely to remain static in the coming months, which is an advantage to borrowers, both existing and new. Of course, the extent to which a borrower would benefit depends on other factors, including agreements signed before loan approval. Let’s take a look at some of them.

Home loans, usually taken over a prolonged period, result in a lot of interest outgo. (FILE)

Home loan

Home loans, usually taken over a prolonged period, result in a lot of interest outgo. A fall in interest rate can have a considerable impact on the total interest paid. Most lenders approve home loan applications charged on floating interest rates. In a circular passed by the RBI in October 2019, it is compulsory to link all floating rate loans to an external benchmark from the several benchmarks included in the circular. With most banks choosing repo rate as the benchmark for their loans, the continued fall in repo rates spells a good sign for borrowers as they will spend less money on repaying their loans through equated monthly installments (EMIs).

Existing home loan borrowers who had sought loans on a fixed interest rate basis have to continue repaying them at the same rate. However, borrowers with loans more than three years old must check if they have benefited from the reduced interest rate. For this, they must check the benchmark under which their loan had been sanctioned. Those who had not linked their loans to any external benchmark may have to continue paying high interest on loans. However, they may also ask their lenders to switch their loans to external benchmark-linked loans in lieu of nominal charges or shift their loans to other banks.

Vehicle loan

Vehicle loans are mostly taken for five to seven years, and are approved on a fixed interest rate basis. Seeking one now means getting the loans financed at considerable low-interest rates that will remain fixed over the tenure. Borrowers will benefit from low EMIs throughout the loan tenure due to the fixed nature of the loan. Those with an existing loan can escape the burden of paying more interest by shifting the loan to another lender. However, one must check details regarding foreclosure charges regarding loan prepayment. If foreclosure charges are considerably low and there is a lot of time left for loan repayment, it makes sense to benefit from the lower rate charged by another lender.

Personal loan

Personal loan rates are higher than other loans due to their unsecured nature. Seeking personal loans now at the current interest rates means prolonged savings on interest payment with a hike in interest rates unlikely in the near term. However, personal loan borrowers must be aware of their credit score as it has an effect on the interest rates offered to them and whether the lenders charge interest on a fixed or floating interest rate basis. Those with existing personal loans, however, may be in for a bit of an unpleasant surprise if they had sought the loan on a fixed interest rate basis. Borrowers can ask for a switch if they realize a huge difference between their loan rates and the current interest rates. Those in the first cycle of their loan repayment will benefit most as these loans are allowed for three to five years only, thus, resulting in good savings. This is because a major portion of the EMIs paid during the first half of the repayment period consists of the interest amount.

Personal Finance is a weekly feature that aims to provide our readers pertinent and helpful financial information