With Banks Set To Raise Interest Rates, Cutting A Good Deal Is Not Easy.

The Reserve Bank of India recently hiked the repo rate by 25 basis points, making short-term borrowing expensive for banks. In the given scenario, it is just a matter of time before banks pass on the high cost to borrowers. Some banks have already realigned their interest rates. But even in these days of high interest rates, there are measures that potential borrowers can take to ensure that they get money at the lowest possible price. While the most prudent approach would be to avoid spending money that you do not have, there are times when it is imperative you borrow. Under such circumstances, it is best to follow some ground rules to ensure that you get the best possible deal when it comes to interest rates.

Borrowing against assets

These loans have the lowest rate of interest after home loans. If you are looking at a loan for a very short term and have fixed deposits with banks, then borrowing against the fixed deposits is a cheap and quick source of raising funds. One can also use postal savings instruments, gold and shares as collaterals to offer to the banks. However, you should note that the rate of interest will go up as the 'risk' involved with the instrument goes up. Put simply, loan against shares are costlier than loan against fixed deposits. Also note that the ratio of money raised to the value of the security will also dwindle as you offer a risky asset to the banker. In other words, a banker may offer you a loan up to 85% of the face value of the fixed deposit but will be unwilling to extend more than 50% of the market value of equity shares.

Also note that there may be a clause in the loan agreement wherein the bankers reserve the right to sell off such assets if the market value of security offered erodes. Borrowing against real assets you own is another cost effective way of borrowing money. Loan against property and loan against assets such as car can fetch you money at lower prices than personal loans. The loan against property may cost you around 14% whereas the personal loan will cost you around 19%, if you are salaried. The gap remains, if not widens, for professionals and the self-employed. Loan against property also offers a longer tenure compared to personal loans.

Borrow from an existing lender

There are many who have already availed of loans previously and need to borrow some more. For instance, if you had taken a home loan three years ago on a fixed rate of interest to acquire a resale property and now want to borrow for renovation or for purchasing some gadgets, then your existing lender can offer a good deal. Most banks offer you the new loan against property, if you have an existing home loan. The number of EMIs paid on time and a default-free repayment track record decide the extent of money you can raise.

Fixed or floating

The differential between floating to fixed rate of interest in many cases could be nearly 200 basis points. This offers a cushion for floating rate borrowers. If you have taken a loan on floating rate of interest and interest rates begin to drop, you stand to gain.

Cash in on competition

Visit several banks to take advantage of offers. If you are confronted by jargons like flat and reducing interest rates, ask for an explanation. Also try and find out which bank offers the best prepayment policy. Exploring the chances of getting processing charges waived. If you submit your application towards the month end, you stand to bargain for a better deal as banks have their own sales targets to meet.

Avoid credit cards

If you cannot avail of cheaper means of financing and don't have any friend or family member you can borrow from, consider taking a personal loan. All personal loan rates are negotiable and you can use the tricks mentioned earlier in getting a good deal. Avoid borrowing on your credit card as it can be a precursor to a debt trap.

Insure yourself

In case of any eventuality; banks can attach your assets for recovery of loans. So, it would be wise to insure yourself and your property.