Credit Reputation will be good or bad as per the repayment record of the person or any borrower. Every normal person or borrower is under the impression that his or her Credit Reputation, as decided by the Credit Rating Agencies like CIBIL, Equifax, Experian or HighRank in India, will remain good so far the borrower repays the EMI of the loan as per repayment schedule.
But, hold your breath! Frequent change in rates of interest on Home Loans and other Retail Loans can also damage your credit reputation. I have been approached by many clients who informed me that they repaid the EMI of their loans religiously but at the end of the repayment period the banks are asking for more money to be deposited to get clearance of the loan. Have you ever thought that what is the reason for additional demand? Have you ever applied your mind that this additional demand might have been reported by the Banks to Credit Rating Agencies as the amount in default – which could damage your Credit Reputation? To understand the whole problem – one needs to know the Impact of Change in Interest Rates, Cost of Insurance and Other Costs on EMIs of Loans which ultimately damage the credit reputation of the borrower if the borrower is not alert. I had always suggested my readers go for Fixed Rate Options to avoid complications in the future but in the current scenario when the interest rates are continuously declining – it is not a better option.
What to Do if Interest Rate Changes:
If interest rates become low then there is no need to worry as it will be a favorable situation. But in case the interest rates on loans go up due to increase in BPLR of the concerned Bank – then the borrower should immediately visit the concerned Bank and opt for any of the two options:
- Due to increase in rates of interest – if we keep the repayment period unchanged then the EMI will increase. The borrower must get the existing EMI Checks or ECS Mandate canceled and fresh Checks or ECS mandate be given to the lending Banker so that the loan account does not get reported as “Account in Default” to the credit rating agencies.
- Alternatively, the borrower can ask the lending banker to increase the repayment period of the loan in such a way that existing EMI of the loan remains intact even after the increase in interest rates. But the borrower must ask the lending banker to effect changes in their Loan Master Details about the increase in repayment period and the new EMI so that the account remains a Standard Account not only with the lending banker but also with the Credit Rating Agencies.
- If the amount of loan is bigger say in Crores then the borrower can also ask the lending banker to make space for increased liabilities by opting for both the options that are:
- Increase in EMI of the loan for new increased Repayment Period.
- Increase in Repayment Period even after increasing the EMI of the Loan.
By exercising both the options – the additional liabilities, due to increase in interest rates, will be partially absorbed by the increase in EMI and partially by an increase in Repayment Period.
But to exercise such options the borrowers have to remain extra vigilant so that Interest Rate Changes do not adversely affect their Credit Reputation.