Should you refinance your loan?

Jul 06, 2020

The pandemic and its subsequent lockdown, has pulled the carpet from under our feet. Who would have thought it would trigger a downturn that has global ramifications? Those who are entering a recession burdened with debt have an even more stressful time ahead.

SHYAM SEKHAR of ithought approached 90 of his clients to conduct an exercise. The aim was to add value to his clients’ financial wellbeing in a time of economic distress and uncertainty.

Here is his step-by-step guide to help you.

1. Be battle ready.

Most people are more eager to earn on their investments than they are to save on their liabilities. The quest for high returns, actually makes investors do the exact opposite of what they ought to be doing. We are faced with uncertain times and we must prepare for the long haul and challenges we shall encounter.

2. Change perspective.

Saving is a must, whatever be the economic cycle. Lowering spending and increasing savings is the best way to improve your financial health and the foundation to build upon. But do note, that we are in a slowing economy where interest rates are falling. You must work this to your advantage.

3. Tackle liabilities.

When it comes to debt, people fail to realize that it is a millstone round their neck. On the one hand, they save a bit. Then they spend considerable time locating the “best investment”. All the while failing to realize the drain that loans cause on their ability to save and invest. The best way to keep saving when cash flows are constrained is to tackle your liabilities. When you reduce the interest you pay, you increase your savings.

4. Check credit scores. Check interest rates on loans.

We checked the debt that each client has and the rate of interest at which it is being serviced. We also looked at their credit score. As part of holistic financial planning and advice, we collect this data from clients when they sign on with us.

5. Refinance the loans.

RLLR is the repo-linked lending rate. The repo rate is fixed by the Reserve Bank of India every two months. It ensures faster monetary transmission and is better for borrowers in an era of lower interest rates.

MCLR is the marginal cost of funds lending rate.

We calculated the savings for each client, should they shift their loans from MCLR to RLLR. On an average, it would help each client save 10-12 monthly payments, or EMIs.

6. Make the shift.

We did our bit by convincing our clients that there is no need to stick to the current parameters when a more borrower-friendly external benchmarking mechanism for pricing home loan rates is around.

The final push had to be done by them. The banks do no proactively encourage borrowers to switch. They would have to approach their banks and request for the switch to RLLR.

If you do not make the shift, you can renegotiate the terms of the loan. As far as possible, keep paying the EMI and avoid the moratorium.

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