Loans to Become More Expensive

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Mumbai, May 4: Interest rates for all loans will climb as the central bank of India raised its key policy rates by 50 basis points to reduce the pressure of inflation, which is on the cusp to enter the double digit terrain.

On Tuesday, the central bank increased its repo rate from 6.75% to 7.25% and reverse repo from 5.75% to 6.25%. Repo rate is defined as the rate at which RBI lends money to banks, where as reverse repo is the rate at which RBI borrows from banks.

For example, if someone borrows a home loan, then the increase of 50 basis points in the interest rates will have an impact on the borrower too. Suppose she/he has borrowed a 20-year loan, then the EMI or the monthly installment will increase by Rs 34 for every lakh that they had borrowed. In the same manner it can be noticed that a five-year auto loan will also witness an increase of Rs 25 per lakh. 

For the first time in eight years, RBI has also increased interest rate on savings deposits from 3.5% to 4%. All the banks stated that this increase in cost will be passed to the customers. 

The central bank's hike will come into immediate effect, and will impact on new home and auto loans. Existing auto loan consumers will not be affected.

Perhaps, it won't be a bad idea to postpone the plan to buy a car using loan or make a cash purchase. For someone who already holds a loan, a better option would be to prepay the loan. If it is not possible to close the account, then at least pay back a part. 

The only trouble is that some banks charge a penalty of approximately 2% pre-closure of a loan. But on calculation it will come out that even a penalty costs less compared to a higher rate over 20 years. Another thing to remember would be that, when interest rates go up, the better option would be to go for a higher EMI rather than increasing the tenure.

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