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RBI’s repo rate cuts are guaranteed to benefit borrowers


RBI’s repo rate cuts are guaranteed to benefit borrowers

The Reserve Bank of India deciding to cut down the repo rate by 25 basis points to 6 per cent. This is a great news for borrowers as they now have to pay lesser EMIs at lower interest rates for the same tenure of loan repayment. The home loan rates are likely to plummet and stand at around 8 % per annum. And the good news does not end there. It is being speculated that the lenders are planning to come up with special festive season offers in the coming months which will involve further reduction of the loan rates. As per the RBI the repo rate will be reduced by 0.25% but this will only be applicable when the next interest rate reset date comes.

The marginal cost of funds (MCLR) is a type of lending rate on loans be it on house or car or any other commodity. This rate is revised every year and generally any change in the interest rate will commence after the completion of that year’s MCR rates. The MCLR rates are however not the only factor that one has to consider on interest rates. There is a spread amount that the bank is allowed to impose on top of the MCLR rates which in turn increases the EMI amounts for the borrowers. Therefore, the actual interest rate over the principal amount is obviously either equal to the MCLR rate amount or greater than the amount depending upon the additional markup or spread amount. This spread amount varies from one lender to another. For example, the spread amount stood at 0.25 % for most banks in the initial days irrespective of the loan amount. The spread for State Bank of India however stood at 0.4% even though the MCLR rates are lower than any other bank in the country. The highest spread is around 1% for the Bank of Baroda. However with reduced MCLR almost all bank stand at par with the net interest rate ranging between 8.4 to 8.6 %.

In spite of the reduced interest rate there are several other factors that the borrower has to keep in mind while procuring a loan. There are various other costs involved such as switching over fee that can potentially increase the repayment amount. Thereby it is of utmost importance that one looks into these factors such as prepayment conditions, foreclosure schemes, reset period and switching without penalties in order to prevent any hassle later on in the tenure.

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