With Reserve Bank of India’s (RBI) interest hike, interest rates on loans have gone up by 2%. Although the percentage might not seem very significant, for loan borrowers it means an increase by a lot!
If you are a home loan borrower, after these hikes you may be forced to consider one of the following two options: either extend the tenor of your home loan or increase you EMI payments. If it is the first option, for example, if your existing loan tenor is for 10 years, a 2% increase could mean an extension of the tenor for another 5 years. If you choose the second option, you will be burdened with high EMI payments which will scrap away a major portion of your finances thereby disabling you to concentrate into other financial matters.
If you are not willing to give in for the above mentioned options, you are left with only one last option-change your borrower. Now, this decision may sound simple, but you as a borrower need to look into a few important facts before transferring your loan to another bank.
The procedure:
When you approach a new bank and explain your need to get your loan transferred, the new bank pays the old bank the due amount and takes over the loan and becomes the owner of the borrowed amount. However, this does not come free of charge for you. The old bank will definitely charge you with a prepayment penalty for carrying out such a transfer. Apart from this expense, you will also have to bear the processing charges and the documentation charges that your new bank states since it comes under the ambit of a new loan.
When should you go for it?
Cost:
In this rising interest rate scenario, if you are burdened with the consequence it only makes sense if you change your lender only if the interest rate charged by your prospective bank is even 0.5 % less than your existing bank’s interest rate, you still stand a chance to gain. For example, if you have borrowed a loan of Rs 50 lakh, considering that the interest rate charged by your bank is 0.5 % and the processing fee and prepayment penalty is 3% and 5% respectively, you still stand a chance to gain in the long term. Since the prepayment penalty and the processing fees are one time payments, you might be burdened in the initial phase but finances can be handled well as time passes by. Let us consider 2 cases:
Case 1:
If you had taken a loan of Rs. 50 lakh a year ago at 11% for 15 years, switching for the rest of the term (14 years) to another lender giving 10.50% and with a 2% prepayment penalty and 1% processing fee you still get to save Rs. 1.04 lakh in total interest outgo. With the same loan figures just by decreasing the rate of interest to 10% at the same prepayment penalty and processing fee, you will be able to save up to Rs. 2.46 lakh.
Case 2:
For the same loan amount and prepayment penalty as mentioned above, the tenor of 14 years and interest of 10.50%, increase the processing fee to 4% and the new loan will become costlier by Rs. 41,519.
Time:
In the initial years of your loan repayment stage, the major portion of your EMI goes towards interest payment and a little part to the principle amount and as the tenor comes to a close it goes the other way round. Therefore if you are planning to change your lender it is better to do it in the initial stage of loan repayment. Else there is a high possibility that you may more or less enter into loses by having to shell out more amount in clearing the debt than what was thought of earlier.