Borrowers would be well advised these days to ensure their banks aren't gouging them on their rate of interest with the Reserve Bank of India (RBI) relaxing new loan rules. , the RBI intends to maintain transparency and prevent customers from overpaying, yet there is no guarantee some banks won’t still apply interest rates that are above what customers warrant. In this article, we’ll discuss 5 ways to tell if you’re paying more on your loan.

Check Your Rate against RBI’s Reference Rate (Repo Rate)

The easiest way to check if you have a high interest rate is by finding out whether it’s higher than RBI’s current repo rate, i.e. the rate at which RBI lends to commercial banks. If the repo rate is low, the banks are free to lower their lending rates and to share the savings with the customers.

If the RBI’s repo rate goes down but your bank hasn’t honed down your loan rate, you could be overpaying. The RBI has recently been pushing banks to align rates closer to the repo rate and for loans based on foreign benchmarks in particular. If there is a lot of gap between what you are getting and the repo rate you can check on RBI’s website and see if the repo rate is similar to the interest rate you are receiving.

Know the Difference Between Fixed and Floating Rates

Loan interest rates generally come in two types: fixed and floating. In the case of a fixed rate, you know that your rate will fall and rise with no more changes to be made on the prevailing rate that remains the same during the life of the loan. In a floating rate, on the other hand, any movement in the bank’s benchmark or RBI’s external rate would affect any changes in your rate.

If you borrowed money at a high interest rate period when rates were high and went for a fixed rate you would now have a much higher interest rate than is currently available on the market. Here you may be overpaying and should think about refinancing or moving over to a floating rate plan so it adjusts to market conditions. You can make a big difference in your overall payment by reviewing if you should have a fixed or floating payment.

Find out whether your loan’s MCLR or EBR is linked

Interest rates on loans in India are now measured by the Marginal Cost of Funds Lending Rate (MCLR) but most banks have switched over to the External Benchmark Rate (EBR) where MCLR is linked to the repo rate. MCLR-linked loans change according to that bank’s internal cost of funds, and EBR loans move in sync with external benchmarks.

If others in your bank have made the switch to EBR-linked rates on their loan, but yours is still on MCLR then you may be paying more. EBR loans are often more transparent and are more responsive to repo rate changes than any others so that borrowers avail better deals. They’ll ask your bank if you can switch to an EBR rate for a better interest rate.

Compare Your Rate with Online Loan Aggregators

For example, by comparing loan rates across the bank you can get a basic idea of what’s fair currently in the market. Online loan comparison platforms and aggregator websites help you easily find the rates that different banks will offer for the same type of loan.

If your rate is noticeably higher than what they're advertising on the platforms, then you should talk to your bank about it. If more favorable terms are to be found elsewhere, banks sometimes will offer competitive rates to keep loyal customers, and it’s worth negotiating (a little) for a better rate.

Try and find Unusually high processing and Hidden Fees

Banks with lower interest rates often make up the difference to you by charging off-the-table high processing fees, administrative costs, or other types of hidden charges. All of that said, factoring in these fees adds up fast, so you could find yourself paying a lot more than the interest rate suggests.

Pay close attention to your loan agreement to make sure you aren’t paying additional fees that will add to your loan costs. This is why, the RBI has made the banks more transparent by asking them to declare any and every fee clarity regarding them. Use these charges for comparison with what other banks are charging; if yours are high, you may be overpaying without realizing it.

Final Thoughts: Taking Control of Your Loan

The RBI’s new regulations, however, provide borrowers with a greater chance of getting fair and transparent mortgage rates. More precisely, there is still room for banks to interpret and apply these regulations differently. The ability to regularly review your loan terms, compare them with present market rates, and understand your rate structure could give you the power to govern your borrowing costs.

If you think you are overpaying, ask your bank if they would be willing to restructure or refinance your loan. In a competitive lending environment, banks must be willing to renegotiate terms to keep valuable customers. Don’t be afraid to go shopping around, and remember that the best loan is one you’re comfortable with, and make sure you understand and are able to agree with the costs.

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