Select the Affordable Personal Loan in the Current Rising Interest Rate Regime
In September 2022, the reserve bank of India announced that the repo rates have increased by 50 basis points. Repo rates mean the interest rate at which the central bank lends money to commercial banks. This has brought the current repo rate to 5.90%. Because the repo rates are directly related to commercial loan interest rates, the overall rise in the interest rate regime has impacted borrowers across sectors. This has impacted personal loan borrowers as well.
This increase in interest rates has hit financial institutions and the financial market the hard way. Aspiring borrowers have now become cautious of the impact of rising rates on their finances and have become apprehensive of their borrowing decisions.
Though this interest rate regime is inherent to the lending-borrowing industry, aspiring borrowers can look out for ways that can lead to reduced rates of interest. Here, we will look at various ways that can help make personal loans affordable for individuals. But before that, here is a quick look at how the interest rate regime is impacted by the repo rate changes.
Impact of Repo Rate Changes on Personal Loan Interest Rate Regime
The interest rate regime that commercial lending institutions follow, although not heavily regulated by the RBI, is tied to the repo rate. These are the rates that the RBI levies on all borrowings that commercial lenders make from them. Since it impacts the cost of borrowing for commercial lenders, it has a direct impact on the rates at which they lend a loan to individual borrowers, including personal loans.
To understand this direct impact of the repo rate on commercial loans, one must know that the repo rate is the base rate that governs the final rate levy on individual loans. Lenders add a cost-plus-profit spread to the repo rate to arrive at the final rate levy. So, you must know that the repo rate is the inherent base that impacts these rates and is thus a cause for the rising rates on personal advances.
Even so, the borrowing individual’s risk profile has a lot to do with the final rate levy on their personal loans, allowing the lenders to negotiate with their spread margin to make way for a creditworthy borrower. Thus, there are various ways one can undertake to bring down the applicability of the rates and make these loans affordable.
Ways to Make Your Personal Loan Affordable
1. Compare lending institutions for the lowest rate
The first and the most likable way to seek a low-interest rate for these personal advances is to undertake a market-wide comparison of the available lenders. The interest rates levied by all these lenders do differ by point percentage, even though not too much, and can mean significant savings for the borrower. Plus, some lenders are more inclined to provide personal loans at low rates to borrowers with high eligibility than others. Finding such a lender can lead to suitable negotiations for the best rate and make the loan affordable.
2. Seek out offers during the festive seasons
If you are borrowing around the festive season, you are likely to find offers from lenders that provide loans at low rates. You can approach them to get loans at low rates. Typically, such offers are prevalent with NBFCs providing these advances through quick cash loan apps. Further, borrowing from these apps can also mean easy and hassle-free financing with minimal documentation.
3. Apply with a high credit score
Even though the minimum credit score requirement for personal loans with some lenders is not that high, it is a smart idea to make your borrowing move with a very high score. It indicates a good credit profile of the individual with a history of thorough repayments and other credit parameters. It thus makes their profile low risk, keeping their borrowing affordable.
4. Borrow within your maximum financial capacity
You must also apply for a loan within your maximum financial capacity. You must check your income, calculate your current income-to-debt ratio, and the possibilities of a job change or job loss. Doing a detailed analysis keeps your repayment liability low and makes you better eligible for the advance.
5. Choose a long tenure for repayment
At last, you can choose a long repayment tenure to keep your EMIs low when borrowing. Low EMIs mean a reduced repayment load on your monthly income, making you a favorable borrower for the financier with affordable rates.
Apart from reducing the interest rates on your personal loan, you can also try different ways that help bring down your total loan liability. For instance, you can choose to repay in higher EMIs to save on your interest outgo. You can also choose the balance transfer facility to reduce the rates if you are already servicing the advance.