Most people complain that their home loan rate of interest is not coming down with the rate cuts announced by the banks.What they fail to understand is the mathematics behind the calculation of rate of interest. Through this article, I would like to bring out the main points which affects the home loan rate of interest.The rate of interest in linked to the BPLR or the PLR of the bank.
What is BPLR?
The benchmark prime lending rate (BPLR), or the prime lending rate (PLR), is the rate at which the bank lends to prime borrowers. All retail loans are linked to the BPLR or the PLR. So, any change in it will affect the cost at which you take a loan from a bank.All the home loans are given relative to this BPLR.Whenever there is a change in the BPLR, your floating rate of interest will change.
Then why do customers complain that their interest rates are not falling?
The answer to this question is linked to the other factor which is called Discount or Spread by tha banks.Each bank offers home loan to its new customers by giving some discount relative to the existing BPLR.So, if current BPLR is say, 16% and the customer is offered a loan at the rate of 10%, the Discount/Spread offered to a customer 6%.This discount can vary from customer to customer at any point of time. This Discount is fixed for the complete Home Loan Duration.
Your rate of interest will change only if the BPLR changes.It will not change if the banks offer more Discounts to new customers. Normally, banks increase this discount portion from time to time without decreasing the BPLR.This is why, only new customers are benefitted.
So, if you have taken a loan at a time when this Discount portion is less, you will always end up as the loser. This is what happened with people in year 2004-05. They were offered loans at 6-7%. What they didint realise was that the existing BPLR at that time was either the same or very close to this rate. So, when the BPLR reached around 15% recently, their rate of ineterest also reached around this level.
Point to Learn:
Try to get a loan when the discount offered is more.I request the readers to kindly share their experiences here and also add more information so that everyone gets the full information.
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Sometimes banks put a floor limits on interest rates. For eg : "BPLR is 12.5%, your discount is 3.5% below BPLR , subject to minimum ROI of 9%".
ReplyDeleteNow this means currently your ROI is 9% but in case BPLR falls below 12.5% (say 12%) still your ROI will be 9% only. In this case the discount factor is void. It is completely unfair on bank's side to impose this kind of flooring. What if the RBI further asks to reduce BPLR in case Indian falls into "Depression" ( which is worst state of Recession) ? Will we be shelving off 9 % interest that time too? Usually this thing is not told to customer. He comes to knwo tis only when he gets sanction lettter. till then bank has already charges processing and legal fees.