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What borrowers can do to combat loan interest rates uptrend?


On September 30, the Monetary Policy Committee (MPC) upped the repo rate by 50 basis points (bps), bringing it to 5.90%. This fiscal year, the MPC has raised the key rate by 190 basis points to combat inflation, which reached a five-month high of 7.41% in September. However, retail inflation has remained above the RBI’s upper tolerance limit of 6%, and as a result of banks raising interest rates on a variety of loan products due to the rise in the repo rate, borrowers will now be required to make higher equated monthly installments (EMIs) for loans taken amid rising interest rates throughout the nation’s financial system. When the key policy rates go up, interest rates on loan products are also hiked by financial institutions to meet their borrowing cost. The next monetary policy meeting will be in place in December, and the RBI is anticipated to raise the repo rate once more to curb rising inflation. Hence, in the midst of rising interest rates, what can borrowers do to combat them?

Nidhi Manchanda, Certified Financial Planner, Head of Training, Research & Development at Fintoo said “A crucial point to know is that many people are of the view that these rising interest rates are not affecting them just because their EMIs remain the same. When the interest rate rises, often banks or financial institutions will increase your loan tenure instead of rising the EMIs. So, borrowers should check with their bank or lending institution about increase in loan tenure. It could be 3 years or even more added to your loan tenure depending upon the terms of the loan which adds to huge interest costs. Amid rising interest rates, borrowers should try to increase their EMIs if their cash flow allows instead of increasing loan tenure to get out of the debt trap early and save on huge interest costs.”

She further claimed that “Let’s say you have a loan of 50 lacs for 25 years with an interest rate of 8.5%. So, your monthly EMI would be approximately Rs. 40k, and the total interest paid in 25 years would be around Rs. 71 lakhs. Paying an extra EMI every year will save 17 lakhs of interest cost. Similarly, if you increase your EMI by 5% every year with an increase in your income, you will save 32 lakhs of interest cost. When increasing your EMIs seems difficult, consider using your annual bonuses to become debt free early. For e.g., you repay additional Rs. 1 Lakh per year along with your EMIs. This way the loan will be paid off in around 16 years instead of 25 years making you save 30 lakhs of interest cost. Also, if the CIBIL score of a person is good, he/she can try negotiating with the bank or refinance the loan to save interest to some extent.”

Amit Singh, Founder, UniCreds said “The first and most important step for any student hoping to finance their education is to understand the basics of loans and repayment. While interest rates of banks rise, the final interest rate that the student can avail will depend on factors like the student’s academic track record, financial background, established credit history and credit scores, etc. These processes and terminologies are often understandably unfamiliar to students just getting out of high school or undergrads. Therefore, developing a firm understanding of how best to position oneself for a loan is essential before applying for a loan.”

He further added that “Another aspect that can considerably influence the interest rate is the reputation of the college that the student has applied for, the nature of the course and the probability of the student getting a job right after college. For instance, banks prefer professional courses that position the students to get prospective job offers during the last year of college itself.”

Amit Singh has stated the below ways to ensure low/stable interest rates:

Explore university-tied lenders: Certain universities directly collaborate with financial institutions for the benefit of their international students. Educational loans acquired this way are processed faster, have lower interest rates, and benefit from reduced volatility as well.

Fixed rate loans check uncertainties: Fixed-rate loans are the preferred form of loan in overseas education. This is only natural as fixed rates allow students to plan long-term without worrying about fluctuations in the myriad market conditions. Variable-rate loans are discouraged as their interest rates are beyond the control of both financial parties.

Seeking professional advice- Engaging with a platform specializing in loans can help with critical information on which financial institution is better for your requirement. They can help you compare interest rates of Banks, NBFCs, domestic loans, international loans and also suggest smart ways to repay. According to UniCreds, 84.8% of loans on the platform are approved through NBFC and only 14.5% by banks. Coupled with the fact that 53.5% of student loans are rejected, choosing the right option and service provider could be a major decision for any student’s future loan prospects. Professional help may also be a practical time-management tool for students, as they can devote more time to other requirements like insurance processes or visa documentation.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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