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Worried about paying higher EMIs? A high credit score can help

Worried about paying higher EMIs? A high credit score can help

Today's rate hike by the RBI means that loans would become more expensive as banks usually raise loan interest rates when RBI decides to increase the lending rate.

After three consecutive interest rate hikes, the repo rate has been stretched by 140 bps; 40 bps in May, 50 bps in June and August, respectively. After three consecutive interest rate hikes, the repo rate has been stretched by 140 bps; 40 bps in May, 50 bps in June and August, respectively.

The Reserve Bank of India (RBI) on Friday raised the key lending repo rate by 50 basis points (bps) to 5.40 per cent, marking a third straight increase that took the key lending rate above the pre-pandemic level. After three consecutive interest rate hikes, the repo rate -- rate at which banks borrow from the Reserve Bank -- has been stretched by 140 bps; 40 bps in May, 50 bps in June and August, respectively.

The rate hike indicated at RBI's intention to tighten liquidity further to tame inflation, an expert said.

"The central bank again signalled its intention to tighten liquidity by increasing the repo rate for the third time. These hikes will gradually withdraw the high liquidity pumped into the market in 2020 and play its part in taming inflation, which has remained above the RBI's upper tolerance level for several months," said Adhil Shetty, CEO, Bankbazaar.com.
 
Loans to become more expensive

Today's rate hike by the RBI means that loans would become more expensive as banks usually raise loan interest rates when RBI decides to increase the lending rate.

"People who borrowed at rock-bottom rates of 6.50 per cent to 7.50 per cent in the last two years will see their loan tenors increasing substantially as their rates rise. In floating rate loans, EMIs (equated monthly instalment) remains constant, and the tenor normally adjusts for the rate change. For example, a Rs 30 lakh loan at 6.50 per cent for 20 years will have an EMI of Rs 22,367. But at the same EMI at an 8 per cent rate, the tenor increases to 28 years and 6 months," the Bankbazaar.com chief executive further said.

It can also interfere with other financial plans such as investing for retirement or children's education, he added.

A higher credit score can help

In this situation, a person with a high credit score -- above 750 -- can get some respite as home or other loans are offered at a cheaper rate.

"If you are a prime borrower (credit score over 750, stable income, loan payments on time), you can get home loan offers at a premium of around 250-275 basis points over the repo rate. The premium varies from lender to lender, so the range could be lower or higher depending on your financial profile and the lender," he added.

Here, premium refers to the rate that a lender charges over repo rate.

To put it simply, higher credit score is, lower would be the loan interest rate.

"Credit scores impact your home loan rate. If you're above 800, you may be eligible for the lowest rates subject to the satisfaction of other eligibility criteria. The lower your score, the higher your rate," said Pankaj Bansal, Chief Business Officer, BankBazaar.

There could be a 50-bps difference in the rates paid by someone at 800 (credit score) and someone at 700 as the first may be paying 7.50 per cent, but the other may already be at 8 per cent, he added.