Interest rates are rising. What can you do about your personal loan?
Banks have announced a rise in interest rates. While this means your deposits may fetch higher interest, it also means that your loan may be getting costlier. If you have a personal loan, now may be the right time consider all your options. While your existing personal loan interest rate may not fluctuate with the overall trends, it pays to be smart. If you are entering the personal loan market with a fresh requirement, it is also the right time to shop for the most competitive interest rate available.
For existing loans
Personal loans come with fixed interest rates. For instance, if you are paying 15% interest rate for a 4-year personal loan, your interest and EMI will be computed based on 15%. It does not matter if the personal loan interest rate in the market drops to 12%. You will still have to pay 15%. This is why it makes sense for you as a borrower to do a few things.
Firstly, you can opt for a personal loan balance transfer. This smart move will help you to take the existing loan to a new bank, such as IDFC Bank, and pay a lower interest rate. Through this route, you can transfer the personal loan to another bank, thereby allowing you to take the benefit of the most competitive loan rates. Do keep an eye out for the charges and fees associated with personal loan balance transfer. Calculate the overall cost, including fees, of having a transfer personal loan to another bank. Do not blindly go for a personal loan balance transfer just for lower interest rates than your existing bank.
Secondly, you can reduce your EMI by repaying some principal. Most banks allow partial repayments twice in the loan tenure. You as a borrower can do partial repayment of the principal by paying 25%. With part-prepayments, a borrower can either reduce his EMI while keeping his loan tenure intact. Do remember that you should not sacrifice your emergency fund corpus to repay or prepay. Banks charge a 2-5% fee for all prepayments after a personal loan where the EMI has been paid for at least 12 months old. The prepayment fees progressively become lesser as your tenure rises.
Shop for a lower rate
Transferring an existing personal loan to another bank at a relatively lower interest rate is a good option. Shopping for a new personal loan, at a lower interest rate, helps reduce the interest cost of the loan. This is done without impacting your disposable income and other existing investments. Do remember applying for a new personal loan at 12% (versus an existing loan of 14%) means that the new lender will treat your personal loan application as a fresh one. This may lead to levying various charges like processing fees, administrative charges, etc. which are often associated with fresh personal loan applications.
It would be worth your while to compare personal loan interest rates across banks. If interest rates rise were to raise another 50-75 basis points (1 basis point is equal to 0.01 per cent), personal loan interest rates may also rise but intelligent borrowers should still do comparisons. Because even a 1% lower interest rate can lead to good savings over a 3-4 years loan tenure. Any interest cost saving is practically money earned for you.