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Refinance your loan to take benefit of linkage to repo rate

The linking of your loan to repo rate will be a transparent way to ensure faster transmission of policy rate changes by RBI

By Chaitali Dutta

Q. As it is now mandatory to link floating rate retail loans to the repo rate, will my existing loan from a NBFC be linked to the repo and will there be a spread? –K P Srinivasan

This rule applies to only new loans sanc-tioned October 1, 2019 onwards. Existing loans will continue under the terms and conditions as per sanction. You may have to look at refinancing of the loan if you want the benefit of interest rate linked to repo/3- or 6-month treasury bill yield. All loans linked to a benchmark have a spread. This spread would not be reset until there is change in borrower credit assessment.

Q. I have five years to repay my home loan. Should I ask my bank to link my loan rate to repo rate? —Anmol Gupta

You may have to ask the bank to sanction you a new loan under the new policy effective October 2019. The outstanding of your old loan will be extinguished by debiting your new loan account. The linking of your loan to repo rate will be a transparent way to ensure faster transmission of policy rate changes by RBI. Please ask your bank for the additional costs involved in this transition.

Q. Are car loans given on a fixed rate? Should I prepay my car loan? —Rakesh Singh

Usually, auto loans have floating rate interest. However, in certain tie-ups with car manufacturers, there may be a few fixed-rate car loans. If you have the funds, pay off as much as possible. Cars are depreciating assets, therefore try to keep the interest payment to the minimum.

Q. I want short-time loan as I will receive some money in six months. Can I pledge my FD to get loan at a lower rate? —Arun Krishnan

Sure, all banks will give a loan against FD with them. The amount would be 75% of FD value, you need not pay any EMIs. Loan is paid off from the FD’s maturity proceeds, if continued till that date. The interest rate will be about 1.5% higher than the rate you were getting on the FD.

Q. I plan to take an education loan for my daughter. Can she start paying EMI after two years when gets a job? —Preeti Sood

Yes, student has to start repayment once she gets a job after the course. In the study period, parents can pay the simple interest accrued on the loan, to reduce the burden for the child. The parent will get the benefit of income tax on the full amount of interest paid for these intervening years.

(The writer is founder, AZUKE Personal Finance Advisory (www.azukefinance.com). Send your queries to fepersonalfinance@expressindia.com)