On 30 September, the Monetary Policy Committee (MPC) raised the repo rate by 50 basis points (bps) to 5.90%. In this financial year, the MPC has increased the key rate by 190 basis points to tackle inflation, which hit a five-month high of 7.41% in September. However, retail inflation remains 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 an increase in the repo rate, borrowers will now need to make higher equated monthly loans. Installments (EMIs) for loans taken amid rising interest rates in the country’s economy. When key policy rates rise, interest rates on debt products are also raised by financial institutions to meet their borrowing costs. The next monetary policy meeting will be held in December, and the RBI is expected to raise the repo rate once again to check rising inflation. So, amid rising interest rates, what can borrowers do to counter them?
Nidhi Manchanda, Certified Financial Planner, Head of Training, Research & Development, Fintu, said, “An important point that many people believe is 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 extend the tenure of your loan instead of increasing the EMI. Hence, borrowers should check with their bank or lending institution about the increase in the loan tenure. Depending on the terms of the loan this can add up to 3 years or even more to your loan tenure which adds to the huge interest cost.Amidst rising interest rates, borrowers should try to increase their EMIs if their cash flow Allows you to get out of the debt trap early instead of extending the loan tenure and save huge interest costs.
He further claimed that “Suppose you have a loan of 50 lakhs for 25 years with an interest rate of 8.5%. So, your monthly EMI will be around Rs. 40k, and the total interest paid in 25 years is approximately Rs. 71 lakhs. Paying additional EMIs every year will save 17 lakhs in interest cost. Similarly, if you increase your EMI by 5% every year with the increase in your income, you will save 32 lakhs interest cost. When increasing your EMIs seems daunting, consider using your annual bonus to become debt free quickly. For example, you can pay an additional Rs. 1 lakh per year along with your EMI. This way the loan will be repaid in about 16 years instead of 25 years thereby saving you 30 lakhs interest cost. Also, if a person has a good CIBIL score, he can try to negotiate with the bank or refinance the loan to save interest to some extent.
Amit Singh, Founder, UniCreds, said, “The first and foremost step for any student hoping to finance their education is to understand the basics of loans and repayment. While the interest rates of banks rise, the final interest rate that the student will receive is can depend on factors such as the student’s academic track record, financial background, established credit history and credit score, etc. These processes and terminology are often incomprehensible to students. Dropping out of high school or undergraduate. Hence Before applying for a loan, it is essential to develop a firm understanding of how to best position yourself for a loan.
He further added that “Another factor that can significantly affect the interest rate is the reputation of the college for which the student has applied, the nature of the course and the likelihood of the student getting a job right after college. For this reason, banks prefer vocational courses that position students to receive potential job offers during their final year of college.”
Amit Singh has suggested the following ways to ensure low/stable interest rates:
Explore University-affiliated lenders: Some universities collaborate directly with financial institutions for the benefit of their international students. Educational loans acquired in this way are processed faster, have lower interest rates, and also benefit from low volatility.
Let’s examine the fixed rate loan 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 the fluctuations in myriad market conditions. Variable rate loans are discouraged because their interest rates are beyond the control of both financial parties.
seek professional advice Connecting with a platform that specializes in loans can help in getting vital information on which financial institution is best suited for your requirement. They can help you compare interest rates for banks, NBFCs, domestic loans, international loans and also suggest smart ways to repay. According to UniCreds, 84.8% of loans on the platform are through NBFCs and only 14.5% are sanctioned by banks. Coupled with the fact that 53.5% of student loans are declined, choosing the right option and service provider can be a big decision for any student’s future loan prospects. Professional assistance can also be a practical time-management tool for students, as they can devote more time to insurance procedures or other needs such as visa documentation.
The views and recommendations given above are those of individual analysts or broking companies and not of Mint.
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