Demystifying Education Loan Series : Chapter 1 | Floating Interest rates | What do they float against?

At? Peaceful-Loans , we have frequent conversations with students who have secured admissions in prestigious universities abroad. They are searching for the most affordable education loan to make their dreams come true. When they mention "cheapest," they are referring to the interest rate. Despite our efforts to educate and guide them to consider other loan aspects, it seems that many overlook these factors.

Interest rate, often referred to as ROI (Return on Investment), is a vanity metric in its raw form. Although I have reservations about this narrow focus, I will attempt to help them understand the importance of interest rates.

Most education loans operate on floating interest rates. But what exactly is a floating interest rate? How does it fluctuate? And what indicators influence potential increases or decreases in the loan's interest rate?

Understanding how floating interest rates function in these loans is crucial for making informed decisions.

In India, education loans are offered by various institutions, including:

1. Public sector banks like SBI, BOB, and UBI.

2. Private sector banks such as ICICI, Axis, Yes, and IDFC First.

3. Non-Banking Financial Companies (NBFCs) like HDFC Credila, Avanse, and InCred.

Additionally, these interest rates are linked to the repo rate set by the Reserve Bank of India (RBI), broadly speaking.

Now, does that mean if the repo rate were to decrease by 50 basis points (0.5%) next quarter, my loan interest rate would immediately reduce by the same amount? The simple answer to this complex question is no. It might, but there are no guarantees.

e.g. SBI typically offers education loans with floating interest rates linked to the Marginal Cost of Funds Based Lending Rate (MCLR). If the repo rate decreases by 50 basis points, SBI may consider revising its MCLR, which would consequently affect the floating interest rate on their education loans.

Now, what determines this "may"?

State Bank of India (SBI) periodically reviews and adjusts its Marginal Cost of Funds Based Lending Rate (MCLR). The frequency of these revisions can vary depending on market conditions, the prevailing interest rate environment, and the monetary policy established by the Reserve Bank of India (RBI). Historically, SBI has revised its MCLR on a monthly basis. However, it's important to note that the actual frequency of MCLR revisions may change based on the bank's internal policies and external factors. To obtain the most accurate and up-to-date information regarding SBI's MCLR revision schedule, it is recommended to visit their official website or contact the bank directly.

For historical MCLR data, you can refer to:?https://lnkd.in/de9jksSA

If you find this complexity challenging to grasp and desire expert guidance, feel free to reach out to us at?www.Peaceful-Loan.com #studyabroad?#educationloan