What can borrowers do to combat rising interest rates on loans?

On September 30, the Monetary Policy Committee (MPC) raised the repo rate by 50 basis points (bps), bringing it to 5.90%. During this fiscal year, the MPC raised the policy rate by 190 basis points to combat inflation, which hit a five-month high of 7.41% in September. However, retail inflation remained above the RBI’s upper tolerance limit of 6%, and following banks’ interest rate hikes on a variety of lending products due to the rise in the repo rate, borrowers will now be required to make higher monthly installments. payments (EMI) for loans contracted in an environment of rising interest rates throughout the national financial system. When policy rates rise, interest rates on loan products are also raised by financial institutions to meet their cost of borrowing. The next monetary policy meeting will be 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 combat them?

Nidhi Manchanda, Certified Financial Planner, Head of Training, Research and Development at Fintoo, said: “A crucial point to know is that many people feel that these rising interest rates do not affect them simply because that their NDEs remain the same. When the interest rate increases, banks or financial institutions often increase the term of your loan instead of increasing the EMI. Thus, borrowers should check with their bank or credit institution about increasing the term of the loan. This could be 3 years or even more added to your loan term depending on the terms of the loan, which adds huge interest charges. Amid rising interest rates, borrowers should try to increase their EMIs if their cash flow allows, instead of increasing loan terms, to get out of the debt trap quickly and save on huge interest charges. »

She further claimed that “Let’s say you have a 25 year 50 lac loan with an interest rate of 8.5%. So, your monthly EMI would be around Rs. 40k, and the total interest paid in 25 years would be around Rs. 71,000,000. Paying an additional EMI every year will save 17 lakhs in interest charges. Similarly, if you increase your EMI by 5% every year with an increase in your income, you will save 32 lakhs in interest charges. When increasing your EMI seems difficult, consider using your annual bonuses to quickly get out of debt. For example, you pay back additional Rs. 1 Lakh per year with your NDEs. This way, the loan will be repaid in about 16 years instead of 25 years, saving you 30 lakhs in interest charges. Also, if a person’s CIBIL score is good, he can try to negotiate with the bank or refinance the loan to save interest to some extent.”

Amit Singh, Founder of UniCreds, said: “The first and most important step for any student looking to finance their education is to understand the basics of loans and repayment. As bank interest rates rise, the final interest rate the student can claim will depend on factors such as the student’s educational background, financial history, credit history and credit scores, etc out of high school or undergraduate. Therefore, 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 influence the interest rate is the reputation of the college the student has applied to, the nature of the course, and the likelihood of the student getting a job right after college. For example, banks prefer vocational courses that position students for potential job openings in the senior year of college itself. »

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

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

Fixed rate loans verify uncertainties: Fixed rate loans are the preferred form of loan in education abroad. This is only natural, as fixed rates allow students to plan for the long term without worrying about fluctuating countless market conditions. Variable rate loans are not recommended because their interest rates are beyond the control of the two financial parties.

Seek advice from a professional- Engaging with a platform that specializes in lending can help you gain essential information about the best financial institution for your needs. They can help you compare interest rates from 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 by 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 outlook. Professional help can also be a handy time management tool for students, as they can spend more time on other requirements such as insurance processes or visa paperwork.

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

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