Banks will not tell you this, but a better credit score can mean a cheaper loan

India economy


Armed with a strong credit score and a little conviction, Ram returned to his bank and convinced them to lower his interest rate to 8.5%. That drop of 50 Base-Punts may sound small, but it translated into savings from £25 Lakh on his £1 crore loan for 25 years.

Although the example of RAM is illustrative, the approach is actually based – many borrowers are successfully negotiating over lower interest rates after their credit scores improve.

In this article we will go through how banks calculate the interest rates and how you can ensure that you get the most favorable conditions.

How do banks come with interest rates?

Banks consider three important factors in deciding how much interest should be charged on a loan.

The first is the REPO rate – the rate against which the Reserve Bank of India (RBI) grants money to commercial banks. Because this rate is checked by the RBI, banks must revise their credit rates in response to any changes. From now on the REP rate rate is 6.25%.

The second factor is the Markup of Spread, which is essentially the profit margin of the bank. For example, if the bank applies a markup of 2.75%on top of the repo rate of 6.25%, the effective interest rate of the housing loan becomes 9%.

The third factor is the creditworthiness of the borrower. If banks are sure that a borrower has indicated a low risk mastery due to a high credit score, they are often willing to reduce their profit margin.

Instead of charging the full 9%, a borrower with a Cibil score of 800 or higher, for example, can receive a discount of 80 basic points, so that the effective interest rate is brought to 8.20%.

“Credit score is one of the most important factors in risk-based prices. In addition to the above, other factors are the profile of the customer and the type of real estate that is purchased,” said an official of IIFL HOUSING Finance.

Also read: Credit score versus credit report: What is the difference and why they matter

Jagadesh Mohan, founder of Emisaver.com, a startup that helps people to plan money and save on loans, said that if the borrower decreases a liability insurance from real estate, the banks are willing to further reduce the interest rate with 5 basic points, although such insurance is somewhat expensive.

Credit trip begins

For most people, their credit trip starts with a credit card or a small ticket loan-such as a loan from two-wheelers. After a year or two of timely repayments and maintaining credit use under 30%, their Cibil score often crosses 750. But the reaching of 800 and furthermore, a larger loan, such as a housing loan, must usually be justified.

That is why many first borrowers may not be eligible for the best interest rates in advance. But over time, while building a record of reimbursements, their credit score improves. Even those with poor credit history can see their scores rising considerably after a few years of disciplined EMI payments.

Most banks do not openly publish how much interest they charge for each credit score bracket. However, they follow this data internally and often revise it. Punjab National Bank, for example, currently offers the following rates for home loans up to 10 years:

  • 8.15% for scores above 800
  • 8.30% for scores between 750-799
  • 8.75% for scores between 700-749
  • 9.85% for scores between 600-699

When your credit score improves, it is worth approaching your bank to request a revision in your interest rate of your home loan.

If the bank manager refuses this request, the borrower can opt for a balance transfer. With a balance transfer, the borrower can transfer the balance to a new bank. Borrowers usually use this facility when they get a lower interest in the other banks, although it incurs some costs.

“If the credit score is declining, there is always an option of balance transfer to another lender at a lower rate or you can submit a request with the current lender to reduce the rate against payment of the applicable switch costs,” said an IIFL Home Finance official.

If the banks do not admit to reduce interest rates, Mohan van Emisaver.com recommends that an in-principal approval of another bank at a lower interest rate and to show the documents to the current bank where they have the loan.

“Banks do not want to lose customers, especially when the borrower’s credit score is over 800,” says Vinay Uppin of Emisaver.com. “Banking usually remembers from touching their top customers because they are the least risky.”

Also read: Government to roll out credit for rural borrowers in six months

What should you do?

There can be three scenarios that can come for borrowers. If they already have an excellent credit score (more than 800) before they take a housing loan, they will receive attractive rates from the start.

For many people, however, it is the first time they borrow and therefore have not built their credit score. Or they can fail in the past or delayed and have a bad credit score.

In one of the last cases – whether you have started with a low credit score or no credit history at all – will probably improve your score after a few months or years of timely EMI payments. But most borrowers do not follow this change or do not fail to act in it, which means they miss the chance of re -negotiating their loan conditions.

If your credit score has been improved since taking the loan, a reduced interest rate can lead to considerable savings on the loan of the loan. Consider consulting a loan advisor often bring a fee, but the long-term savings can outweigh the costs.

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