The Reserve Bank of India (RBI) has made the first baby-step towards an easy money regime on February 7 by reducing the benchmark lending rate by a quarter of a percentage--well after four long years and nine months. But the cheer was not really shared by all borrowers as almost 60% of the loans are still tied to the opaque MCLR (marginal cost-based lending rate) interest rate setting regime and only 40% of the loans are linked to the most transparent repo rate, called the EBLR or external benchmark linked lending rate.
The EBLR regime, in its original form, meant that any change in the repo rate — the rate at which the RBI lends to banks — should immediately reflect in the existing loan rates. But borrowers very often don’t get that positive benefit – reduction in floating rates of loans.
For instance, in the present instance of the rate cut by the RBI earlier this month, some seven banks, including Bank of Baroda and PNB passed on the benefit to existing borrowers but when the market leader – State Bank of India -- woke up to do so after 10 days, it did not lower the rates for the existing customers but for new retail and small business borrowers.
So, how can you get your EMIs lowered?
To put it pithily, you need to maintain a good credit score, choose the right loan tenure, go for a floating rate interest rate, negotiate with your lender, make a larger down payment and consider moving to another lender especially if it’s a long-term home loan.
Improve your credit score
When you seek a loan or want to transfer your loan to another bank and or even to get your interest rate reduced one of the most important conditions is to have a good credit score of say 800 and above— 900 is the peak score. The better your credit score, the lower the interest rate you will have to pay. And credit scores are not just about paying your EMI on time.
Choose the Right Loan Tenor
Though a longer tenure will translate to a lower EMI, the interest you will end up paying will be much higher. A 10-year home loan is the most ideal as the principal portion in your EMI will be almost 65% your EMI amount.
Opt for a floating rate
Home loans are offered on fixed and floating interest rates depending on your demand. Fixed rates remain constant throughout the loan tenure — but the rate will change if there are three consecutive repo rate hikes. As the word means, floating rates keep changing depending on the market conditions. Generally, floating rates are lower than fixed rates, which makes them a more cost-effective option in the long run.
Make occasional down payments
A down payment is a lump sum amount you pay in one go after taking a loan, which can normally be done after six months of the loan. A healthy down payment also shows the lender that you are committed to repaying your loan, which makes you a less risky borrower.
Transfer your loan to another lender
If you have been repaying your loan for a few years and have a good repayment history, you can consider transferring your loan to another lender who offers a lower interest rate.
However, before you make the switch, please calculate the costs involved in the transfer such as processing fee, franking fee or any other associated expenses and calculate the total cost of the would be available interest rate.