Home, personal, and car loans are expected to get costlier after the Reserve Bank of India (RBI) on Friday increased the repo rate by 50 basis points to 5.9 per cent, the fourth rate hike since May this year, in efforts to rein in inflation.
So, what it means for borrowers? Experts say that all home, car, personal, and education loans on floating rates would become costlier for the existing borrowers, while new borrowers would pay a higher price on loans. Banks' higher borrowing costs lead to a proportionate rise in lending rates.
Says Raj Khosla, founder and managing director (MD) of MyMoneyMantra.com, a loan aggregator, in a statement: "Now we're headed toward the high cost of borrowings period. The fresh hike in the repo rate is likely to have a market-wide impact on borrowers as existing EMIs (equated monthly instalments) and new loans are set to become costlier as banks factor in the fresh hike after the respective reset cycles."
However, says Khosla, it brings good news for depositors as the interest rates on fixed deposits (FDs) and recurring deposits (RDs) would fetch a decent return.
Here're a few things that borrowers should know:
The repo rate increase would lead to longer tenure or higher EMI for home loan borrowers. The banks could increase the loan tenure so that the EMI remains unchanged, but the number of years for payment increases.
According to industry experts, banks and other financial institutions increase their lending rates as their borrowing cost increases, making EMIs costlier.
V Swaminathan, executive chairman, Andromeda Loans and Aapnapaisa.com, a loan distribution firm, says, "When inflation is beyond control, we would advise people to pre-pay their loans to curb additional charges levied on them. While this would impact the borrowers in the short term, it would certainly turn out beneficial in the long run. We would also recommend borrowers cut down on other sundry expenses to manage their finances efficiently."
Swaminathan warns of another possible repo rate increase in the following quarter and advises borrowers to stay cautious about their spending habits and "adopt a sustainable lifestyle to maintain financial stability."
The borrowers could also pay a higher EMI while remaining in the ongoing repayment schedule.
Car And Personal Loan
As the repo rate increases, your car loan would also go up. "Assuming an interest rate of 8.5 per cent, the EMI per lakh comes to Rs 2,052 per lakh for a five-year term. A 0.5-per cent increase means the EMI per lakh goes up to Rs 2,076. That's an increase of Rs 24 per lakh. Your interest per lakh also goes up by Rs 1,451, from Rs 23,099 to Rs 24,550 per lakh," says Adhil Shetty, founder and CEO, BankBazaar.com, a financial services website.
Shetty advises borrowers to check if there are any pre-payment clauses involved, and if there are none, consider part payment to reduce the burden. It will not only help retain the EMI but also help close the loan faster. One could also consider a fixed-rate loan if the difference in interest rates is not high.
"The interest rates will go up before they stabilise, and a fixed rate loan could be a good idea. But, do a back-of-the-envelope-calculation before you take a call," adds Shetty.
In the case of personal loans, public-sector banks (PSUs) offer loans at floating interest rates, while private banks offer at fixed interest rates. Hence, if your personal loans are based on floating interest rates, the EMIs would also go up. Therefore, you need to prepare accordingly to handle EMIs.
Swaminathan adds that the current rise in the repo rate has formally ended the era of low-interest rates, and floating rate loans are set to rise drastically.
"As the car and personal loans are already charged above the base rate, the effect on them would be much higher compared to home loans," says Swaminathan.
He advises borrowers to refrain from taking more loans, especially personal or car loans, and concentrate on pre-paying the existing ones first.