In May and June this year, the Reserve Bank of India (RBI) hiked the repo rate by 90 basis points, and last week by another 50 bps, to control liquidity and keep a check on inflationary pressures. The repo rate is the interest rate imposed by the RBI on borrowings made by commercial banks. Consequently, banks and financial institutions raise interest rates they charge on home, personal and vehicle loans. While loan borrowers who had agreed to a fixed rate of interest before this raise remain unaffected, this is not good news for those who have been planning to apply for a two-wheeler loan right now, as also for existing borrowers who had earlier opted for a floating interest rate.
Sumit Chhazed, the co-founder & CEO of OTO—the two-wheeler financing start-up—shared with FE the tips and tricks to keep a check on two-wheeler loan dues with rising inflation. These tips, however, are only applicable for floating or flexible interest rates.
Increasing the tenure of loans
“Most lending institutions and NBFCs provide an option to their customers to increase the tenor of the two-wheeler loan with regard to rising interest rates without affecting the EMI,” Chhazed said. “This implies that you’d be entitled to close the outstanding loan amount by taking more time or through an extension of the loan tenure to a few more months.”
Making pre-part payments
Many lending institutions allow you to make pre-payment facilities as this can facilitate the borrower to close or reduce the loan amount before the loan tenure ends, which can simultaneously bring down the financial burden during times of inflation. “If you have funds available, you may pay off a portion of the loan, keeping the EMI and tenure the same. In this way, your interest wouldn’t surge too much,” Chhazed said.This implies that the amount you pay towards the loan could curtail your financial liability by bringing down the principal amount, which can result in a reduced EMI amount. The impact of the increased interest nullifies. Alternatively, you may opt to topple down tenure.
Loan balance transfer
Chhazed added that if you feel your bank has raised the interest rate to meet inflation, you can opt out to outperform a loan balance transfer. “Most lenders allow loan balance transfer at competitive rates, and hence do proper research and consider your monthly budget before arriving at a decision,” he said. “The transfer process is simple: You will have to close your account with the existing bank and transfer the outstanding principal amount to a new bank by paying a transfer fee. Post the transfer, the new bank will be entitled to pay off the loan and you are required to make the EMI at the new rate of interest. You can benefit from such a transfer.”
The aforementioned factors only present a general overview of meeting financial obligations during times of rising inflation. You can also attempt some self-regulation hacks on your personal expenses, inculcating a habit of savings and investing in fixed income bearing instruments like fixed deposits, bonds, PPF, etc, as increasing rates at the time of inflation can be a boon to this segment and they yield higher returns. Additionally, you can set off the extra amount you ought to pay with the amount you saved. Lastly, avoid discretionary purchases.