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The value of your money is a function of inflation in the economy. That drives up interest rates or the cost of money. When the prices of goods and services rise rapidly, interest rates rise at the same time.
If you’re a regular reader of Personal Finance, you’re familiar with the monthly update of the consumer price inflation index, or CPI. However, if you’re not into finance, you should look at the money you’ve spent in the last month and compare it to previous months. Inflation eats away at the value of your money. You pay more every year for the same quantity of goods.
As inflation remains stubbornly high, interest rates are expected to remain firm at the same time. Although India is becoming the fastest growing major economy in the world, persistently high inflation and interest rates would keep that growth in check. There is no sign of inflation trending down or interest rates peaking.
You need to evaluate your loan portfolio if interest rates remain high. If you have opted for an adjustable rate loan, your loans will be affected by changes in interest rates. You will be regularly informed by your lender about changes in interest rates. Your equated monthly installments, or EMIs, could increase, or the lender may send you a notice proposing an increase in your tenure or the number of installments remaining.
It’s time to review your loan portfolio. As a first check, the interest rate development should be determined. A leading indicator is the yield on 10-year government bonds. This is usually the benchmark for interest rates set by the Reserve Bank of India for banks to borrow money.
It is available online and updated daily. If it moves up month-on-month, rates are likely to remain stable or continue to rise. If it shows a bearish trend, it could indicate the peak in interest rates and the inflation trend. The 10-year bond yield is influenced by expectations of inflation trends in an economy.
You can then calculate the average interest rate you pay on all of your loans. This can include your home, car, personal, and credit card loans. Retail lending is growing faster than other lending as banks are awash with money. They want you to borrow more money when interest rates rise. If you have a good credit rating, you would regularly receive new loan offers. (Typically 750 and up)
If you have excess cash in the bank and an outstanding credit card, you may want to pay it off first. Next in line are personal loans. The interest rates on them vary depending on your credit history. You may consider paying part or all of the principal upfront.
Auto loan agreements are usually watertight, and you have little leeway to make changes. If you don’t have any credit card or personal loan debt, you can pay off your car loan because it’s a short-term loan.
All loans could incur a prepayment penalty.
When interest rates rise dramatically, you should consider your adjustable rate home loan for a remortgage. Competition among banks is intense. There’s a good chance that relatively newer banks will offer you a refinancing facility, where you do a “balance transfer” of your existing home loan to the new bank. It is the new bank that buys the loan from your old bank. Banks enable this for their business needs. The new bank needs new customers, while the old bank may want to prop up capital by selling existing assets.
Your home loan is your cheapest financing option. If you have no other loans, you should wait before paying off this loan early.
According to most local and global experts, India’s economy is likely to grow steadily over the next decade. That means your stock market investments can also generate a steady return. Paying off the home loan early by selling investments or stopping regular SIPs could hurt your finances. Talk to a professional advisor and work on a plan.
Don’t rush to prepay a home loan
According to global experts, India’s economy is expected to grow steadily over the next decade. That means your stock market investments can also generate a steady return. Paying off the home loan early by selling investments or stopping regular SIPs could hurt your finances.
(The author is editor-in-chief at www.moneyminute.in)
The value of your money is a function of inflation in the economy. That drives up interest rates or the cost of money. When the prices of goods and services rise rapidly, interest rates rise at the same time. If you’re a regular reader of Personal Finance, you’re familiar with the monthly update of the consumer price inflation index, or CPI. However, if you’re not into finance, you should look at the money you’ve spent in the last month and compare it to previous months. Inflation eats away at the value of your money. You pay more every year for the same quantity of goods. As inflation remains stubbornly high, interest rates are expected to remain firm at the same time. Although India is becoming the fastest growing major economy in the world, persistently high inflation and interest rates would keep that growth in check. There is no sign of inflation trending down or interest rates peaking. You need to evaluate your loan portfolio if interest rates remain high. If you have opted for an adjustable rate loan, your loans will be affected by changes in interest rates. You will be regularly informed by your lender about changes in interest rates. Your equated monthly installments, or EMIs, could increase, or the lender may send you a notice proposing an increase in your tenure or the number of installments remaining. It’s time to review your loan portfolio. As a first check, the interest rate development should be determined. A leading indicator is the yield on 10-year government bonds. This is usually the benchmark for interest rates set by the Reserve Bank of India for banks to borrow money. It is available online and updated daily. If it moves up month-on-month, rates are likely to remain stable or continue to rise. If it shows a bearish trend, it could indicate the peak in interest rates and the inflation trend. The 10-year bond yield is influenced by expectations of inflation trends in an economy. You can then calculate the average interest rate you pay on all of your loans. This can include your home, car, personal, and credit card loans. Retail lending is growing faster than other lending as banks are awash with money. They want you to borrow more money when interest rates rise. If you have a good credit rating, you would regularly receive new loan offers. (Typically 750 and up) If you have excess cash in the bank and outstanding credit cards, you may want to pay them off first. Next in line are personal loans. The interest rates on them vary depending on your credit history. You may consider paying part or all of the principal upfront. Auto loan agreements are usually watertight, and you have little leeway to make changes. If you don’t have any credit card or personal loan debt, you can pay off your car loan because it’s a short-term loan. All loans may incur a prepayment penalty. If interest rates are rising dramatically, you should consider rebalancing your adjustable rate home loan. Competition among banks is intense. There’s a good chance that relatively newer banks will offer you a refinancing facility, where you do a “balance transfer” of your existing home loan to the new bank. It is the new bank that buys the loan from your old bank. Banks enable this for their business needs. The new bank needs new customers, while the old bank may want to prop up capital by selling existing assets. Your home loan is your cheapest financing option. If you have no other loans, you should wait before paying off this loan early. According to most local and global experts, India’s economy is likely to grow steadily over the next decade. That means your stock market investments can also generate a steady return. Paying off the home loan early by selling investments or stopping regular SIPs could hurt your finances. Talk to a professional advisor and work on a plan. Don’t rush to prepay a home loan According to global experts, India’s economy is likely to grow steadily over the next decade. That means your stock market investments can also generate a steady return. Paying off the home loan early by selling investments or stopping regular SIPs could hurt your finances. (The author is editor-in-chief at www.moneyminute.in)
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