What can borrowers do to counter rising lending rates?

On September 30, the Monetary Policy Committee (MPC) increased the repo rate by 50 basis points (bps), bringing it to 5.90%. During this financial year, MPC raised its base rate by 190 points to combat inflation, which hit a five-month high of 7.41% in September. However, retail inflation remained above the world. RBI’s upper tolerance limit is 6% and as banks raise interest rates on a wide range of loan products due to the increase in repo rates, borrowers will have to pay higher monthly. installment payments (EMI) for loans made amid rising interest rates throughout the country’s financial system. As key policy rates increase, interest rates on lending products are also increased by financial institutions to meet their borrowing costs. The next monetary policy meeting will take place in December and the RBI is expected to raise the repo rate again to curb rising inflation. So, in the face of rising interest rates, what can borrowers do to counter them?

“An important point to know is that many people assume this interest rate hike doesn’t affect them just because of EMIs,” said Nidhi Manchanda, Certified Financial Planner, Head of Training, Research & Development at Fintoo. theirs remains the same. When interest rates rise, it’s common for banks or financial institutions to increase your loan term instead of increasing your EMI. Therefore, borrowers should check with their bank or lending institution about extending the loan term. Your loan term can be 3 years or even more depending on the terms of the loan, which adds up to large interest costs. In the context of rising interest rates, borrowers should try to increase EMI if their cash flow allows instead of increasing the loan term to get out of the debt trap early and save large interest expenses. “

She further stated that “Assume you have a loan of 50 lacs for 25 years with an interest rate of 8.5%. So your monthly EMI will be around Rs. 40k, and the total interest payable over 25 years will be around Rs. 71 thousand. Paying more EMI annually will save 17,000 interest costs. Similarly, if you increase your EMI by 5% each year with the increase in income, you will save 320,000 in interest expenses. When increasing your EMI seems daunting, consider using your annual bonus to get debt-free early. For example, you pay extra Rs. 1 Lakh per year along with your EMIs. This way, the loan will be paid off in about 16 years instead of 25 years, saving you 30,000 in interest costs. Alternatively, if a person’s CIBIL score is good, they can try negotiating with a bank or refinancing a loan to save interest to some extent. “

Amit Singh, Founder, UniCreds said “The first and most important step for any student looking to fund their studies is to understand the basics of loans and repayment. While bank interest rates increase, the final interest rate a student may be entitled to will depend on factors such as the student’s academic performance, financial background, established credit history, and credit scores, etc. These procedures and terms are usually easy to understand for students. out of high school or lower grade. So developing a solid understanding of how best to position yourself for a loan is essential before applying for a loan. “

He added that “Another aspect that can significantly affect interest rates is the reputation of the university the student has applied to, the nature of the course, and the probability that the student will get a job shortly after graduation. university career. For example, banks prefer professional courses that help students land potential job offers during their senior year of college. “

Amit Singh outlined below ways to ensure low/stable interest rates:

Explore college-bound lenders: Some universities directly partner with financial institutions for the benefit of their international students. Education loans obtained this way are processed faster, have lower interest rates, and also benefit from reduced volatility.

Fixed rate loans check for uncertainty: Fixed-rate loans are the preferred form of financing for educational activities abroad. This is natural as fixed rates allow students to plan for the long term without worrying about fluctuations in a multitude of market conditions. Variable rate loans are not recommended as their interest rates are beyond the control of both financers.

Seek professional advice- Interacting with a specialized lending platform can help provide important information about which financial institution is better for your request. 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 the NBFC and only 14.5% by banks. Coupled with the fact that 53.5% of student loans are denied, choosing the right option and service provider can be a major decision for any student’s future loan prospects. any student. Professional help can also be a practical time management tool for students, as they can spend more time on other inquiries like the insurance process or visa documentation.

The views and recommendations expressed above are those of individual analysts or brokerage firms, not those of Mint.

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