Calculate the absolute gain before switching to MCLR from base rate

MCLR adjusts your interest rate more proactively compared to base rate, thereby protecting the consumers' interests

I have an existing SBI Maxgain home loan. Here are its details:

Book Balance: Rs8,88,193.

Available Balance: Rs16,64,635.

Limit: Rs25,52,558.

Drawing power: Rs25,52,558.

Rate of Interest: 9.6%

I am planning to close this home loan in the next 6-8 months. However, I am not sure if I should switch to Marginal Cost of Funds based Lending Rate (MCLR) now. Would I save a significant amount of money after paying all the charges for moving from base rate to MCLR? Also, please let me know if you have any additional suggestions for me, as I don’t have much idea about how Maxgain works. I simply used to deposit all my savings into it to reduce the interest from EMIs. Please advise.

—Alok Dubey 

It is good to know the benefit of MCLR over base rate before you plan to do a switch over. MCLR adjusts your interest rate more proactively compared to base rate, thereby protecting the consumers’ interests. State Bank of India recently reduced its housing loan rates to 8.35% for loans below Rs30 lakh. Assuming the same rate for you, you will be able to save 1.25% and reduce your interest rate from the existing 9.6% to 8.35%. The benefit it will be giving will be in direct correlation to the repayment period of your housing loan. But as you plan to repay the loan within 6-8 months. the advantage you get would be only 0.625% (1.25/2) assuming 6 months as period of holding. In absolute terms on the current outstanding loan the benefit comes to Rs5, 550. And this is when you have not adjusted the cost of conversion from the base rate to MCLR. So it is good that you continue with the existing base rate. Further, the kind of loan that you have is more of an overdraft loan wherein the surplus corpus held by you can be deposited in the loan account and the loan outstanding is adjusted from the said amount deposited and the interest is then payable only on the net amount.

So these kinds of loans are recommended when you maintain high bank balances and also when the interest rate on loans is steep versus what an investment with moderate risk offers you.

I have two credit cards that I use every month for my expenses. I used to pay full amount due and have been doing so for the past 1.5 years. I started using cards to build a good credit score. However, last month, due to some unforeseen circumstances, my credit card spending spiked. If I miss just one payment, how badly will it affect my credit score? I also want to get rid of one of my cards at least. Kindly advise how I should manage my credit cards and get rid of them. 

—Raghav Goel

Any default in credit card payment or for that matter any other loan repayment can have an impact on your credit score and can reduce your rating. The rating can improve once you make the payments but the damage would have been done. It will then take time for the score and rating to improve.

There can be either minor defaults or major defaults. Minor defaults can be termed as those that have been rectified, that is, payments were made within 90 days and major defaults are the ones where payments are outstanding beyond 90 days and which eventually can become non-performing assets (NPAs).

Minor defaults improve over a period of time and are temporary in nature but you can carry a risk of higher borrowing cost as well as rejection by the lending agency if you happen to apply for a loan, let’s say within 6 months of default. So it is good to spend within your limitations and not go beyond your cash flows. 

And yes, having a credit card is recommended, provided you can manage your spends well but if not then you can opt for a debit card, which does not allow you to spend more than your balance in the bank. At the same time, you can surrender one of the two credit cards. It can be done by either writing to the card provider or by calling their help line. But do ensure that you have checked the last transaction statement and all balances have been cleared and there are no payments linked to the card. 

Surya Bhatia is managing partner at Asset Managers.

Queries and views at