Ex­ist­ing Cus­tomers Mostly Pay Higher In­ter­est

Consumer Voice - - Home Loans -

You may not know that the ex­ist­ing cus­tomers of the bank end up pay­ing more in­ter­est as com­pared to new cus­tomers. This is be­cause loans by banks are linked to their base rate (be­low which they can­not lend). The loan rate is usu­ally base rate plus a mar­gin – for ex­am­ple, base rate plus 50 ba­sis points (bps). Banks ar­rive at the base rate after look­ing at their cost of funds and other fac­tors. That is why in­ter­est rate is dif­fer­ent across banks. While the base rate may change, the bank can­not al­ter the spread (earn­ing) or the mar­gin at which it has of­fered loans to ex­ist­ing cus­tomers. So, if the base rate comes down from 10 per cent to 9.75 per cent, the in­ter­est rate for ex­ist­ing cus­tomers will fall from 10.50 per cent to 10.25 per cent (con­sid­er­ing a spread of 50 bps). How­ever, the banks can of­fer new loans at a higher or lower mar­gin – say, base rate plus 25 bps. So, for a new cus­tomer, the rate may be 10 per cent (base rate at 9.75 per cent), while old cus­tomers will con­tinue to pay 10.25 per cent. Ex­ist­ing bor­row­ers may feel ‘cheated’ by such a dif­fer­ence in rates. It de­pends upon the pric­ing method­ol­ogy fol­lowed by in­di­vid­ual lenders.

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