Interest Rate On Loans To Go Higher: Here's What Existing Borrowers Should Do?

Interest rates in the country are finally seeing bottoming out and after opening the window to still avail of lower interest rates on various loan products, the country's biggest lender has rolled back the offer and new home loan borrowers will get a lowest loan rate if meeting the eligibility criteria of 6.95 percent.

"Though impact of incentive withdrawal is just 25 basis points, it may have a system wide impact because other financial institutions usually follow SBI with a time lag," ET Wealth quoted Naveen Kukreja, CEO & Co-founder, PaisaBazaar as saying.

And now another incidence substantiating the move is the hike in FD rates by mortgage lender HDFC which brought about a hike of 10-25 basis points after a time period of 29 months, suggesting reversal of interest rate trend in the country. This is as the higher cost of funds will have to be managed by a consequent hike in loan rates.

Now so in all probability banks will hike the interest rate on floating rate loans:

In an event if there is interest rate hike then banks shall extend the tenure and not increase the EMI amount. There can be a case that on an outstanding loan amount of Rs. 50 lakh for a tenure of 20 years, you may have to service 23 more EMIs and if you do not wish to push your loan tenure, an additional amount shall have to be borne for the increase in interest rate.

Nonetheless those in the higher age bracket will not be given this loan tenure reset option so with no option left they would have to pay higher EMIs.

Also, this increased tenure burns a hole in your pocket through higher interest payout. Another suggestion here can be to offload your investments in low yielding instruments and make upfront payments.

Switching of loan to other lender offering a lower rate is advised in case the loan tenure remaining is still long say 15 years.

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