Interest rates play a crucial role in personal loans. A personal loan is an unsecured loan that is given to individuals without any collateral. The interest rate is the cost of borrowing money and is the primary source of income for banks and financial institutions. The Reserve Bank of India (RBI) decides the interest rates that apply to all types of loans in India. In this article, we will discuss how interest rate hikes affect personal loans in India.
What is an interest rate hike?
An interest rate hike increases the interest rates banks, and financial institutions charge on loans. The RBI is responsible for setting the benchmark interest rate for India, known as the repo rate. This rate is the rate at which the RBI lends money to other banks. When the repo rate increases, banks and financial institutions also increase the interest rates on loans, including personal loans.
How Do Interest Rate Hikes Affect Personal Loans?
Interest rate hikes can affect personal loans in several ways, including:
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Higher EMIs
The Equated Monthly Installments (EMIs) on personal loans increase when interest rates increase. This means that borrowers have to pay a higher amount every month towards their loan repayment.
For example, if you have taken a Bajaj Finserv personal loan of Rs. 5 lakhs for a tenure of 5 years at an interest rate of 10%, your EMI would be Rs. 10,582. However, if the interest rate increases to 12%, your EMI would increase to Rs. 11,214.
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Longer Repayment Tenure
To reduce the burden of higher EMIs, borrowers may choose to increase their loan repayment tenure. This means that they have to pay the loan for a longer period and pay more interest in the long run.
For example, if you have taken a Bajaj Finserv personal loan of Rs. 5 lakhs for a tenure of 5 years at an interest rate of 10%, your total interest payment would be Rs. 1,54,952. However, if the interest rate increases to 12%, your total interest payment will increase to Rs. 1,94,673.
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Lower Loan Amount
Higher interest rates may also result in a lower loan amount. This means that borrowers may not be able to get the full loan amount that they require. For example, if you require a Bajaj Finserv personal loan of Rs. 5 lakhs at an interest rate of 10%, your EMI would be Rs. 10,582.
However, if the interest rate increases to 12%, your EMI will increase to Rs. 11,214. If you cannot afford this higher EMI, you may have to reduce your loan amount to keep your EMI within your budget.
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Difficult to Get Approval
When interest rates increase, it becomes difficult for borrowers to get approval for a personal loan. Banks and financial institutions have become more cautious and may reject risky loan applications. This means borrowers with poor credit scores or unstable income may find it difficult to get a personal loan.
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Impact on Credit Score
When borrowers cannot repay their personal loan EMIs on time, it can negatively impact their credit scores. This can make it difficult for them to get loans in the future.
Interest rate hikes can have a significant impact on personal loans in India. Borrowers must carefully consider the impact of higher interest rates on their loan repayment capacity before taking a personal loan.
Higher EMIs, longer repayment tenure, lower loan amounts, difficulty in getting loan approval, and impact on credit score are some of the factors that borrowers must consider. Choosing a loan that fits your budget and repayment capacity is essential. Additionally, borrowers can also take certain measures to reduce the impact of interest rate hikes on their personal loans, such as:
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Opting for a Fixed Interest Rate
Borrowers can opt for a fixed interest rate when taking a personal loan. This means that the interest rate on their loan remains fixed throughout the loan tenure, even if the market interest rates increase. This can help borrowers plan their loan repayment better as they can calculate their EMIs in advance and avoid any surprises due to interest rate hikes.
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Making Prepayments
Borrowers can also make prepayments towards their personal loans to reduce the impact of interest rate hikes. Prepayments can help borrowers reduce their outstanding loan amount and the total interest payment, thereby reducing their loan burden.
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Choosing the Right Lender
It is essential to choose the right lender when taking a personal loan. Borrowers must compare the interest rates, processing fees, and other charges of different lenders before choosing one. Additionally, borrowers must also check the lender’s reputation, customer service, and other factors to ensure a hassle-free borrowing experience.
Interest rate hikes can have a significant impact on personal loans in India. Borrowers must carefully consider the impact of higher interest rates on their loan repayment capacity before taking a personal loan.
Additionally, opting for a fixed interest rate, making prepayments, and choosing the right lender can help borrowers reduce the impact of interest rate hikes on their personal loans. By following these tips and choosing a loan that fits their budget and repayment capacity, borrowers can manage their personal loans better and avoid any financial stress in the future.
