For best transmission of rates to the end borrower, the RBI has suggested repo rate to be an external benchmark to which most retail loans can be pegged. And despite the repo rate or rate at which RBI lends short term money to lending institutions being at record low, individual borrowers for new loans or when going for refinancing of their old loan scheme are not able to secure the best rate. Here is given details on it:
Interest rates that are charged to loan borrowers
For borrowers the final rate on any retail loan is decided basis their individual capacity as in loan repayment, income flow as in their income on a monthly basis, as well as their credit worthiness over time that is adjudged basis their past credit history.
Having said this to the basic rate decided upon by banks there is charged a risk premium taking into consideration the risk profile of the borrower and his or her credit score. So, if individual's risk is deemed as low, lower risk premium shall be charged and vice-versa.
And now on considering the degree to which banks' have already upped their criteria in securing loan amid the pandemic, we have seen banks increasing risk premium as well as credit score among other measures. "Given the uncertainty surrounding the income and financial stability of borrowers and the risk-aversion among banks, the latter are leveraging the credit score to reduce their credit risk," says Adhil Shetty, chief executive officer, Bankbazaar.
So, this is one reason why despite a fall in repo rates, loan customers are not able to get loans at the best rate on-offer in markets currently.
Furthermore, which earlier there were just 4 slabs of credit score with linked interest rates, the number has been pushed to 5 now.
Also as per a leading business dailies report, the credit risk premium i.e. the difference between what the customer in a low and high credit score slab has also been increased to now 135 basis point, which was earlier just 100 bps. 1 bps is one-hundredth of a percentage point.
Credit Risk Premium And Credit Score Being Banked Upon To Lower Risk
Credit risk premium for new loan customers is already high and if there is a substantial difference in the credit assessment of an existent borrower then this measure shall even be revised for him or her. Also, to lower down the risk in the wake of financial instability banks are banking upon this credit score for which the limit has been enhanced to get the best possible rates available in the market.
Risk Based Pricing Should Not Deter You From Securing Loan; Instead Focus To Maintain Your Credit Score At Its Best Possible
And now when timing is all that matters and if we talk in particular on home loan, which is being offered at rates less than 7% , despite the risk based pricing you will be better off securing loan currently. So, go ahead and continue to work on your credit score, so that the risk premium on your loan does not increase over time and you miss on the best rates at offer currently.
Maintain Credit Score At its highest possible
These are listed ways:
1. Do not fault on repaying loan or credit card dues/ never ever miss them.
2. Have a mix of secured and unsecured loans in your portfolio
3. In respect of your credit card limit, use at maximum 40% limit, don't go overboard.
4. Don't enquire for getting loans from several banks.
5. Don't at random close any credit card account which you had been using for long as it adversely impacts credit score.
6. Also, until the restructuring for your loan is done in case you need so, try and pay your deferred EMIs which were under moratorium until August due to Covid 19 led relief.