Existing Customers Mostly Pay Higher Interest

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.