Interest Rate Reset of EMI based Floating Interest Loans Flashcards
Between 2020 and 2023, how did the repo rate change, and what impact did it have on borrowers with floating interest loans?
The repo rate increased from 4% to 6.50%, resulting in an increased EMI burden for borrowers with external benchmark-based loans.
What are the two options the RBI wants banks to provide borrowers with floating interest loans after an interest rate change?
A) The ability to reset: switching from a floating (external) interest rate to a fixed interest rate.
B) Foreclosure: repaying the entire outstanding loan amount in one lump sum.
What is a key benefit of choosing loan foreclosure over continuing with monthly EMIs?
Foreclosure reduces the total interest burden by avoiding accumulated compound interest (“byaaj-pe-byaaj”) that comes with monthly installments.
What’s a primary concern about borrowers frequently resetting their loan types (fixed/floating) based on fluctuating interest rates?
The concern is that borrowers might misuse this flexibility, switching loan types whenever conditions become unfavorable.
How will the RBI likely address concerns about misuse of the loan reset option?
The RBI is expected to issue guidelines placing limits or ceilings on the number of times a borrower can reset their loan during the loan period.
