Planning to take a bank loan? Check this out

I am sure everyone these days must be hearing about the interest rate war amongst Banks. Well thanks to Demonetization or whatever but we have reason to cheer as the interest rates in our country are significantly going down. Most of you would be thinking that it’s going to benefit me as my home loan has a floating interest rate, but hold on, have you checked your effective rate of interest? It’s high time to do that. If your loan is more than 10 months old you will probably wonder that my interest rate is much higher than what I read in newspaper. It’s because of MCLR. About MCLR In its fantastic move the Reserve Bank of India (‘RBI’) has brought a new methodology of setting lending rate by commercial banks under the name Marginal Cost of Funds based Lending Rate (‘MCLR’), which is effective since April 2016.The new methodology uses the marginal cost or latest cost conditions reflected in the interest rate given by the banks for obtaining funds (from deposits and while borrowing from RBI) while setting their lending rate. This means that the interest rate given by a bank for deposits and the repo rate (for obtaining funds from the RBI) are the decisive factors in the calculation of MCLR. This implies that every time RBI cuts the REPO rate the benefits would be mandatorily passed on by banks to the lenders. What does it mean for your loan? If you have borrowed before April 2016 then your loan would be linked to the then prevailing system called Base Rate. To understand whether Base rate is good or bad is a matter of time, but as on date it’s definitely bad. As evidenced in table below, the MCLR of major banks is considerably lower than the Base rate. Resultantly the rate of interest linked to MCLR are also lower.

Bank	MCLR	Base Rate
State Bank of India	7.75% - 8.15%	9.30%
ICICI Bank	8.00% - 8.20%	9.35%
Axis Bank	7.90% - 8.35%	9.25%
Citibank	8.00% - 8.10%	9.10%
Union Bank of India	8.15% - 8.75%	9.55%
Bank of India	8.10% - 8.50%	9.65%
Bank of Maharashtra	8.75% - 8.95%	9.70%
Canara Bank	8.20% - 8.45%	9.65%
Central Bank of India	8.05% - 8.50%	9.70%
HDFC Bank	7.85% - 8.30%	9.25%

*As on 21 January 2017, source: www.myloancare.in Interestingly, if you borrow home loan today, you will pay interest at the rate of 8.30% to 8.70%but merely because you are old borrower you may be paying interest at the rate of 9.40% to 10%. Can you do something about it? Yes, you are not trapped. At this stage you have two options available, first visit your bank and request them to change your interest rate; second choose a different bank for loan takeover. The second option definitely involves cost as you will end up paying mandatory stamp duty of 0.20% on the amount of your loan and may also pay other charges like loan processing fees, legal fees for title clearance or valuation report etc. First option may also involve processing fees which your bank will definitely demand.With fees or without, but upon request your bank will have to convert your loan from Base rate to MCLR. This will substantially reduce your cost of borrowing, which could mean either reduction in EMI amount or reduction in tenor of your loan. Is processing fees mandatory for conversion? Absolutely not.Very important to note, for conversion of your loan from Base rate to MCLR, processing fees is merely a commercial charge levied by Banks. The processing fees would thus vary depending upon policies of the banks and your negotiation skills.While negotiating, keep in mind the costs involved if you have to change your loan from one bank to other;any processing fees above such cost could be foolish deal. At the same time also note the interest you pay is more important for Bank than the processing fees. So, if you are a good negotiator, you may get a waiver for this processing fees. Happy Negotiations and Savings in interest. Disclaimer: The opinions, beliefs and views expressed by the various authors and forum participants on this website are personal and do not reflect the opinions, beliefs and views of ABP News Network Pvt Ltd.