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Your Loan EMI Is Set To Increase – Here’s How To Reduce Impact

Leading banks SBI, Axis Bank, Kotak Mahindra Bank, and Bank of Baroda hiked their MCLR rates by around 5-10% in late April. Subsequently, RBI too increased the repo rate by 40 basis points, resulting in repo rates jumping to 4.40%; a hike after nearly 4 years amidst the Corona chaos. Do we discuss related how to increase loan EMI?

Banks Increase MCLR – Will My Loan EMI Increase?

Leading banks SBI, Axis Bank, Kotak Mahindra Bank, and Bank of Baroda hiked their MCLR rates by around 5-10% in late April. Subsequently, RBI too increased the repo rate by 40 basis points, resulting in repo rates jumping to 4.40%; a hike after nearly 4 years amidst the Corona chaos.

These rate hikes will now put an additional burden on borrowers of home loans and car loans, resulting in higher loan EMIs. How do brace for this impact? How to realign your repayment plans to protect yourself from such rate hikes? CreditMantri throws some insights for you.

What Is MCLR? How Is It Calculated?

MCLR or marginal cost of funds-based lending rate is the interest rate that banks charge on loans that are not backed by collateral. This was introduced by the RBI in 2016 and serves as the internal benchmark for banks to set their lending rates on various loans.

The objective of MCLR is to ensure competitive and transparent lending rates across banks. “In order to calculate the impact of a rate change in MCLR, you should first understand the workings of MCLR. The marginal cost of funds-based lending rate is the standard rate of interest used by banks for lending. This effectively makes it the minimum rate of interest that a bank can use to lend at, without reducing the rates any further.” states Pramod Kathuria, founder and CEO of Easiloan.

SBI’s MCLR is revised from 6.75-7.40% effective April 15, while Axis Bank’s MCLR is revised from 7.20-7.55% effective April 18. Kotak Bank’s MCLR ranges from 6.65-7.90% and is effective April 16, while Bank of Baroda’s MCLR ranges from 6.50-7.35% and is effective April 12.

According to ICICI Securities research analysts, the incidence rate of the MCLR rate hike will be more impactful as the percentage of floating rate loans linked to external benchmarks (EBR) in the banking sector rises further.

MCLR is typically calculated using the loan tenure, or the time period over which a borrower must repay the loan. Banks also consider the Cash Reserve Ratio, the marginal cost of funds, tenor premiums, and operational costs when determining MCLR rates. While talking about the MCLR calculation, Pramod adds, “The MCLR is reviewed on a monthly basis, the loan repayment amounts are usually reset in six months to a year automatically, subject to the bank’s discretion and the terms and conditions of the loan agreement”

Why The Sudden Increase In Lending Rates By Banks & RBI?

The RBI had kept the repo rate unchanged at 4% for the past 4 years citing the Corona pandemic. There was a need to bring cheaper credit to ailing business owners and individuals who had suffered job loss and business losses.

But the recent war in Ukraine has caused a severe spike in inflation, which crossed the 7% mark. The repo rate is the rate at which the RBI uses to lend to banks. A repo rate increase indicates a hike in the interest rates that banks charge to borrowers, ultimately.

What Does The Most Recent MCLR Increase Mean For Loan Borrowers?

The recent increases in the MCLR by several banks suggest that loan interest rates will rise. “Any modification in the MCLR would have an immediate impact on loan costs like  EMIs.” The EMIs are proportional to the MCLR. “The higher the MCLR, the higher the borrowers’ EMIs,” Kathuria explained. currently, the Borrowers must pay more on  EMIs for home loans, auto loans, and personal loans. This increase in rates will only influence the people with floating-rate loans, not those with fixed-rate loans.

What Should the Borrowers Do Now as the Banks Have Raised MCLR?

With high MCLR rates increasing home loan EMIs, borrowers can take two steps to mitigate the impact. To combat the rising cost of EMI payments, they could extend the term of home loans. The best way to avoid the additional burden of higher interest rates is to extend the loan period to reduce the monthly EMI amount.

Here Are A Few Things To Consider If You Want To Pay Off Your Loans Sooner

#1 Prioritize High-Value Debts

Credit card bills and loans from banks, NBFCs, or online lenders are high-interest loans. These payments should be your top priority because any missed payments can accumulate debt. Make your payment on time, and plan your budget so that enough funds are set aside for all such repayments. Maintain a positive credit history in order to obtain better terms on future loans.

#2 Debt Consolidation For Easy Repayment

It is always preferable to deal with one large problem rather than several small ones. It gives you a clear focus to better manage your debts. If you have multiple credit cards, you can consolidate them all into one large loan. You can now begin repaying only one lender at a convenient EMI.

#3 Stop Incurring New Debts

When you don’t have cash or money in your bank account, you’re more likely to use your credit card or take out a personal loan to buy what you want. Even if certain items are necessary, you will end up spending more than you can afford. It adds new debts to your current debt portfolio. Breaking free from such impulsive behavior can help you reduce your debt.

#4 Create A Budget & Stick To It

Making a budget before you start spending will help you manage your money more effectively. You can avoid extravagant purchases and concentrate on what is most important.

Budgeting necessitates a thorough examination of critical needs, existing debts, and savings. You can create and stick to a budget based on these three factors.

End note:

The cost of living is already putting pressure on the consumer. The recent interest rate hike is only adding to it. Prudent budgeting will help you reduce your current and future debt. Managing your credit and liabilities is the first step toward reducing your debt and improving your financial health.

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