Cheaper Loans – Mumkin Hai?

It was just another day at office and I walked out to the regular darshini (self-service restaurant) for lunch. While I was relishing my paneer fried rice, I overheard a conversation between two colleagues. They were talking about repo-linked loans. They were discussing about ‘a new rule’ because of which home loans and car loans will become cheaper. They were all praise for RBI for implementing this rule and one even went on to say ‘Modi hai to Mumkin hai’. But will your loan actually become cheaper? Will your EMI reduce? Will it benefit the customers? In the next few paragraphs, I will explain what this new rule is and how it will affect you.

What is repo-linked loan?

Repo-linked loan is a loan whose interest rate is based on the repo rate. For starters, repo rate is the rate at which RBI lends to other banks to meet their short-term obligations. RBI reviews this rate every two months and has the authority to change this rate depending upon economic conditions and inflation. The current repo rate is 5.4%. To know more about repo rate, click here.

RBI has been making efforts for banks to move to repo-linked loans since last few months and has finally issued a circular making it mandatory for all banks to offer home and auto loans based on repo rates from 1st October 2019.

How is this loan different from what is in offer currently?

Currently, all loan rates are calculated based on Marginal Cost of Lending Rate (MCLR). MCLR is a rate below which the bank cannot lend to any customer. This rate is arrived at by considering various factors including cost of borrowing for the bank. This rate is calculated internally by the bank. This is where the difference lies. While the MCLR is calculated by the bank and any change made to it is purely the decision of the bank, the new repo-linked loan rates will have to change automatically as and when RBI changes repo rates.

Why is there a need for these loans?

Under the current MCLR based loans, the banks never passed on the complete benefits of rate cuts by RBI to the customers. This resulted in better profit margins for the banks while the customers never got the benefits of lower cost of loans. There have been instances when RBI has expressed its displeasure about this. One such instance can be found here.

Is the new loan better than the previous one?

The answer is yes. The repo-linked loan brings about the much-needed transparency in movement of lending rates. Take for instance the current home loan rate of SBI is repo plus 2.25%. This means the interest rate on the loan will be repo plus 2.25% throughout the tenure of the loan. With current repo rate being 5.4%, the home loan rate is 7.65%. Of course, this is the lowest rate and there will be added margin to factor in loan duration, size and creditworthiness of the borrower.

Can I shift my existing loan to the new structure?

Yes, you can. If your bank has not already started offering repo-linked loans, it will offer one in the next few days. You need to understand the charges involved in shifting to the new structure and calculate the effective savings on interest due to the switch. Make a decision only after evaluating the net savings!

My loan is with LIC Housing Finance. Can I also avail this benefit?

Unfortunately No. Currently, RBI has only made it mandatory for banks to offer these loans. All NBFC’s including the likes of HDFC, PNB Housing Finance, Indiabulls Housing Finance etc. have no obligation to offer repo-linked loans. You can only hope to see such loans from your lender or choose to move to a bank. Remember, shifting a house loan will have costs such as processing fee, legal fee etc. Evaluate your net savings carefully before arriving at a decision.

Is there a catch?

Not exactly a catch, but something that you might not factor. Currently, interest rates are on a downward trend and are expected to remain so for some more time. Hence your loan rates might come down further in the coming months. But do brace up for a situation in the future where interest rates move up. Let higher interest rates not result in a shock.

If you have any question that has not been answered above, please do leave the question as a comment and I will be happy to answer. To know about our various services, click here.

Posted by Alok Chhajer, 10 comments

FLIP your financial situation

If there’s one thing we Indians love the most; it is our freedom, the sense of liberation. We want freedom in every aspect of our lives – from simple things like what we eat, drink and wear to some of the most serious things like our career choices and political preferences. We hate it when we are controlled by anyone – parents, boss or the Government! In this context, I find it highly ironical to see slaves everywhere – in offices, parties and even colleges. Most youngsters today are slaves – slaves of money, slaves of their financial commitments.

Are you one of these slaves? Do you find it difficult to manage your finances by the end of the month? If yes, it is time for you to FLIP! Flip means

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Crazy about Cricket? Six Investing Lessons from IPL!

If there is something that can compete with Mr. Modi in popularity today, it is definitely the IPL. In a country where cricket is a religion and evokes strong emotions, it will be unfair if we do not learn a few investing lessons from the ongoing IPL season. Here are six lessons that you can learn from this IPL.

Investing Lesson 1: The early bird has a better chance of getting the worm.

As I write this, Sunrisers Hyderabad and Chennai Superkings have qualified

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Changes in your Mutual Fund Scheme – The Way Forward

If you are an existing investor in mutual fund, you may have received emails from your mutual fund companies informing you about certain changes in the schemes that you have invested. Chances are high you might not have opened the email and in case you did, you did not read it completely or did not understand what it meant. This blog is for you to understand what these mutual fund changes mean and what impact these changes may have on your investments.

Why the changes?

To begin with, let us first understand the reasons

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Mutual Fund – Kaun Sa Sahi Hai? How to Choose a Debt Fund

In my last blog, I had mentioned about the things to keep in my mind while investing in equity funds. In case you haven’t read that yet, it is available here. In this, I will tell you how to choose a right debt fund.

Most often, when we come across mutual funds, the only things that comes to your mind is save tax and invest in equities for a really long period of time. But this is just one small part of the mutual fund industry. What is often missed is the larger space of investing possibilities in debt funds.

Most agents do not want to sell a debt fund as the commissions are low and the expertise required to understand them is high. Banks never

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Mutual Fund – Kaun Sa Sahi Hai?

Thanks to some great marketing campaigns and real ground work by mutual fund companies, mutual funds have gained mass acceptance among the young investors. We can comfortably say Mutual Fund, Sahi Hai!

This positive change has brought along with it another problem. The problem of plenty. With over two thousand five hundred

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Financial Well-Being – Six Resolutions for the New Year

It’s that time of the year where all of you are making resolutions for the new year. While you deliberate on the resolutions you want to make, here is my recommendation of six resolutions that you should make for your financial well-being.

Resolution 1: I will stick to the below spending pattern.

You earn to spend and save. A careful division of how you save and spend can be the difference between ‘being prosperous’ and ‘want to be prosperous’. The ideal range for your spending and saving is outlined below. Your income is divided into four categories Continue reading →

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Finding the right financial advisor – Six qualities to look at

After my last post, you would be in a good position to know how to start investing. In case you have not read it yet, you can find it here.

A couple of incidents over the last few days prompted me to write about this very sensitive issue – how to choose the right financial advisor.

The first incident happened when I visited a private bank who claims to ‘understand our world’ to deposit a cheque. As expected, Continue reading →

Posted by Alok Chhajer, 8 comments

Best Way to Save Tax – 6 Steps to ‘Look at’

Just yesterday I went to buy a pack of chips to eat while watching India hammer Australia in yet another cricket match. What I thought would be a 2-minute exercise took me more than fifteen minutes. No, it wasn’t the crowd in the shop, but the crowd on the shelf. I thought I will just go and pick up a Spanish Tomato or an American Cream & Onion which I regularly do. But I was Continue reading →

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Stock Market Crashes – What to do?

Yet another day where the stock markets close on the negative. Business channels are already gloomy and there is a visible mourning with lots of red everywhere. What awaits us tomorrow morning is newspapers of all colours with headlines stating thousands of crores of investor wealth destroyed in a single day. Add to it Continue reading →

Posted by Alok Chhajer, 10 comments