RARELY ASKED QUESTIONS ON LOANS

                                                                             26th May 2020

RARELY ASKED QUESTIONS( RAQ) related to your loan

Amid this lockdown the RBI is been making announcements related to interest rate cuts. Many of you would be paying higher interest rates today on your outstanding loans.

We have tried to decode this for you and if you understand this and implement ,it will help you in reducing the interest rates which will eventually reduce the tenure of your outstanding loans. We have divided this into two parts. One, loan taken from banks and another loan taken from NBFC.

Loans taken from Banks

1)     Give me a background of what RBI is doing ?

The RBI is trying to manage the interest rates for all of us, in the best possible way based on the economic scenario prevailing. It either reduces the interest rates or sometimes, increases the interest rates. Currently RBI is reducing interest rates.

2)     Why is RBI doing reducing the interest rates ?

When business/ economy is muted, people who wish to take loans cannot afford taking loans at a higher percentage interest. And people who has already taken loan, find it difficult as their jobs and salary are impacted. Hence, RBI intervened by reducing the interest rate and kickstart the economy.

3)     So what’s in for me ? Why should I bother for whatever RBI does ?

If you are a borrower of loan from bank, you may not be getting the benefits. So you should read these points below to avail the benefits.

4)     Fine, explain me how is my loan interest percentage decided based on the reduction in interest rates by RBI ?

There are two benchmarks on which banks price their loans ( interest rate) for you. It is called MCLR and EBR.

If you have taken a loan before 1st Oct 2019, you fall in MCLR benchmark rates

If you have taken a loan after 1st Oct 2019, you fall in EBR.

( MCLR= Marginal cost of lending rates, EBR= External benchmark rates)

The date 1st Oct 2019,is critical here.

So if you have to get the benefit, you have to understand under which regime your loan is taken.

5)     Explain me what is MCLR, and its advantage /disadvantage for me ?

MCLR is internal loan rate decided by the bank and RBI has no direct role to play here. If you are in MCLR regime, your interest rates are decided by the bank’s borrowing from FD customers.

Ex- If a bank has taken FD of Rs. 1 lac from depositor at 7.5% in the past (currently it is 5.5%), then the bank will add its profit and will charge you an interest higher than 7.5%. This is under MCLR.

Further if the bank reduces MCLR rates, you will not get the benefit immediately. Example, RBI announced 40 paise reduction in interest rates on this Friday, but that is not immediately passed to you as your MCLR rates are fixed in the first week of April by your bank. So if interest rates are reduced today, you will benefit only from April of next year.

6)     I understood MCLR, so tell me the advantage of EBR ?

External benchmark rate (EBR) is the rate that the RBI decides the rate of interest for the borrowers and not banks. It sets a base rate and ask banks to add its margin and then charged to you. Whenever RBI announces reduction in rates, the effect is immediate for you.

7)     I still don’t get it. Take an example to make me understand .

So when your loan is charged under EBR, you will benefit from falling interest rates immediately.

8)     I understood the benefits of External benchmark rate (EBR) regime. So can I assume, my banker will move my loan from MCLR to EBR.

Arre Nahi !!! There is a huge benefit for banks when you stay in MCLR and nor EBR. So your relationship manager/ branch manager will not ask you to convert to EBR. Only smart people who opt in, get the benefits.

9)     So what should I do now to convert my loan from MCLR to EBR ?

You need to visit your bank or loan processing department and request them to convert from MCLR to EBR. The day the request is processed, you will be charged to a lower interest rates. Some banks offer conversion online. Please check.

10)  Is there a cost involved to do this conversion ?

Yes, you bank will charge you an amount ranging between Rs.2000-8000 for this conversion depending on bank to bank. This is because your bank has borrowed money from FD holders at higher rates in the past.

11)  What is the point in paying this cost and getting it converted, I don’t see any benefits immediately?

 Assume that your outstanding loan is 1 crore and you are being charged 8.5% p.So your interest p.a is Rs.8.5 lacs.

 Now, you take our advice and head to the bank and get it converted. Say you are now charged 7.6%. You save Rs.90000 every year. Can you see this benefit

12)  Can you list out the prevailing interest rates under EBR.

This is the list of home loan rates charged by different banks. This is before the last rate cut announced by RBI. If you are in EBR regime, immediately your interest gets reduced by 0.4%.

13)  My loan outstanding is less than 5 lacs. I am rushing to the bank to convert today only.

Wait yaar!!. Read out this first completely. Such conversion will not help you if the outstanding loan amount is less than 5 lakhs and the loan is bound to get over in next 12-18 months.

14)  But still, how does this meagre reduction helps me , my EMI outflow per month still is the same.

Your EMI consists of Interest plus principal. If interest rate reduces, within your EMI your bank will transfer more money towards principal. This will eventually reduce the tenure for you.

One small change and one small advice from our end, helps you to reduce your EMI by 26 months

15)  I have a car loan of 10 lakhs and the outstanding loan tenure is 4 years. What do I do ?

 Please look at the cost benefit analysis carefully. Check the conversion fees, rate of interest being charged and the tenure outstanding and then decide.

Loans taken from NBFC

1)     What is a NBFC ?

It stands for Non-banking Financial company. Which means, it will accept deposits and lend, but technically not a bank. It will not perform the roles that a bank play.

2)     Can you give some examples of NBFC ?

HDFC ltd (not HDFC Bank), Tata Capital, PNB Housing finance, LIC housing finance, Mahindra Capital etc, Bajaj Capital, Sundaram home finance,

3)     How do I benefit from the RBI’s announcement of reduction in interest rates ?

Since NBFC are not directly regulated by RBI, you are not entitled for immediate benefits from the fall in interest rates. It is at the discretion of the NBFC to reduce the rates.

4)     What do I do if my loan is availed from NBFC ?

You have an option to transfer from the NBFC to a bank. Only then you stand to benefit .

5)     My remaining EMI tenure is less than 18 months ? What do I do ?

Please continue with the loan from NBFC. There is a cost involved to transfer from NBFC to bank.

Hope this immensely benefits you in the short term as well as long term. Our endeavor is to help you in all possible way with a proper guidance related to elements on personal finance. Please feel free to write to us back with your queries and we shall answer them.

Compiled by

DEEPESH MEHTA, CFP

Founder,

Grow Wealth

Rajajnagar, Bangalore

Mob 9900445210

 [email protected]

www.happyinvestor.in

( Disclaimer: Grow Wealth is a established wealth management firm since 2007 ,based out of Bangalore and have been advising its clients on all the areas of personal finance like investment planning, retirement planning, child’s education planning, tax planning and estate planning, debt management. The above information should be used for educational purpose. Readers are advised to take professional advice before making any changes and Grow Wealth and its employees will nowhere be held responsible for any losses arising out of this in any manner)