When applying for a home loan, personal loan, or car loan, most borrowers naturally look at the interest rate first. However, there’s another important factor that can significantly impact your total repayment: the interest spread. Understanding both can help you save money over the loan tenure.
1. Interest Rate vs. Interest Spread
- Interest Rate: This is the annual percentage charged on the principal loan amount. A lower rate usually means lower monthly payments.
- Interest Spread: The difference between the base rate (like RBI repo rate or MCLR) and the actual interest charged by the bank.
- Even if the base rate is low, a high spread can make your loan expensive.
2. Why Both Matter
- Focusing only on a low interest rate might ignore hidden spreads or processing fees.
- A loan with a slightly higher base rate but lower spread can sometimes be cheaper in the long run.
3. Tips for Borrowers
Compare Loans on Effective Rate: Always look at the total cost, including spread, processing fees, and prepayment charges.
Negotiate Spread with Bank: Some banks are flexible, especially for good credit score borrowers.
Use EMI Calculators: Check total repayment over the tenure to see which option is cheaper.
Key Takeaway
When taking a loan, don’t just chase the lowest interest rate. Consider the interest spread and total cost of borrowing to make an informed decision that saves money over time.
Disclaimer:
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, employer, or company. All information provided is for general informational purposes only. While every effort has been made to ensure accuracy, we make no representations or warranties of any kind, express or implied, about the completeness, reliability, or suitability of the information contained herein. Readers are advised to verify facts and seek professional advice where necessary. Any reliance placed on such information is strictly at the reader’s own risk..jpg)
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