Reducing interest rate – Everything you need to know
A reducing interest rate, also known as a diminishing or decreasing interest rate, offers borrowers significant savings over time. Unlike fixed rates, this structure recalculates interest based on the remaining loan balance, making it an attractive option for those looking to lower their monthly payments or total interest costs. Whether you're managing a home loan, personal loan, or car loan, understanding how often and when you can reduce your interest rate is essential. By staying informed about the factors that influence interest rate reductions and knowing the adjustment policies for different loans, you can optimise your financial management. In this guide, we'll explore how frequently you can reduce your interest rate, what factors impact these reductions, and the policies tied to various loan types, helping you make informed decisions and maximise your savings.
How often can you reduce your interest rate?
- Loan Tenure and Duration:
You can typically reduce your interest rate at specific intervals during your loan tenure, depending on lender policies and loan type.
- Refinancing:
Refinancing your loan can help you reduce the interest rate. Some lenders allow refinancing every 12–24 months or whenever interest rates drop significantly.
- Bank Policies:
Some banks offer annual reviews of your loan, during which interest rates may be lowered based on market conditions or your credit performance.
- Credit Score Improvement:
As your credit score improves, you can request a reduced interest rate from your lender. This might be possible annually or after significant credit changes.
- Prepayment or Part-payment:
When you prepay a portion of your loan, some lenders allow you to renegotiate your interest rate.
- Market-linked Interest Rates:
For loans linked to market rates like MCLR or Repo Rate, interest reductions occur periodically when these rates decrease, usually every quarter.
- Promotional Offers:
Lenders may offer promotional interest rate reductions for loyal customers or during special financial periods, typically once a year.
Factors that affect interest rate reductions
- Credit Score:
A higher credit score increases your chances of receiving a lower interest rate. Lenders typically offer reductions to borrowers with strong credit histories.
- Loan Tenure:
The longer the loan tenure, the less frequently the interest rate might be reduced, as lenders consider extended timelines riskier.
- Prepayment or Part-payment:
Paying off a portion of your loan early may qualify you for a reduced interest rate, as it lowers the principal and overall risk.
- Income and Financial Stability:
Demonstrating an increase in income or improved financial stability can positively affect interest rate reduction requests.
- Economic Conditions:
In times of low inflation or when the central bank lowers rates, lenders may reduce interest rates for floating-rate loans.
- Loan Type:
Different loans have distinct rate adjustment policies. Fixed-rate loans are less flexible, while floating-rate loans adjust based on market changes.
- Relationship with the Lender:
Strong banking relationships or holding multiple products with a lender can sometimes lead to better interest rate offers or reductions.
- Lender’s Internal Policy:
Individual lenders have unique policies regarding interest rate reviews and reductions, based on their risk assessment procedures.
Types of loans and their interest rate adjustment policies
| Loan Type | Interest Rate Type | Adjustment Policy | Frequency of Adjustment |
| Home Loan | Floating Rate | Adjusts according to the lender’s MCLR, Repo Rate, or other market-linked rates. | Typically reviewed quarterly or annually. |
| Personal Loan | Fixed or Floating Rate | Fixed-rate loans don't adjust; floating rates can change based on market conditions. | Floating rates adjust quarterly or based on review. |
| Car Loan | Fixed Rate | Interest rates remain constant throughout the tenure for fixed-rate car loans. | No adjustment for fixed-rate loans. |
| Education Loan | Floating Rate | Linked to market rates, such as MCLR or Repo Rate, and adjusted accordingly. | Adjusted periodically, typically every 6-12 months. |
| Business Loan | Floating Rate or Fixed Rate | Floating rates can adjust based on market conditions; fixed rates remain unchanged. | Reviewed based on market changes for floating rates. |
| Mortgage Loan | Fixed or Floating Rate | Mortgage rates follow fixed-rate or floating-rate structures, with floating adjusting to central bank policies. | Floating rates reviewed periodically, usually quarterly. |
| Gold Loan | Fixed or Floating Rate | Gold loans often have fixed interest rates, but some lenders offer floating rates based on market fluctuations. | Fixed-rate loans do not adjust; floating varies. |
| Loan Against Property | Floating Rate | Linked to market rates, and adjustments occur when external benchmarks, like Repo Rate, change. | Typically reviewed every 6-12 months. |
Understanding the interest rate adjustment policies of your loan type can help you plan better for future reductions.
How to negotiate a lower interest rate?
Negotiating a lower interest rate on your loan can save you a significant amount of money over time. Whether it’s a home loan, personal loan, or car loan, the key to securing a lower interest rate is preparation, understanding your financial profile, and leveraging the right strategies.
- Improve Your Credit Score:
A good credit score is essential for negotiating a lower interest rate. Lenders view borrowers with high credit scores as low-risk, which gives you the bargaining power to request better terms. Regularly monitor your credit score and ensure that any discrepancies are resolved before initiating a negotiation.
- Research Market Rates:
Before negotiating, research current interest rates being offered by other lenders. If you find lower rates than what you’re currently paying, you can use this information as leverage to request a reduction. Show your lender that better offers are available in the market, and ask if they can match or beat those rates.
- Leverage Your Relationship with the Lender:
If you have been a long-term customer with a good repayment history, use your positive relationship with the lender to negotiate a lower interest rate. Lenders value customer loyalty, and a strong financial relationship can work in your favour.
- Refinancing Options:
Another way to reduce your interest rate is by refinancing your loan. This involves taking a new loan at a lower interest rate to pay off the existing one. When refinancing, ensure the savings from the reduced interest rate outweigh any processing fees or penalties.
- Opt for a Shorter Loan Tenure:
Lenders are more likely to offer lower interest rates for shorter loan tenures as the risk of default is lower. If you can afford higher monthly payments, consider reducing your loan term in exchange for a lower interest rate.
- Provide Proof of Financial Stability:
Lenders are more likely to reduce interest rates for borrowers with stable and rising incomes. Show your lender that you have improved financial standing by providing documents such as salary slips or tax returns.
- Negotiate During Promotional Periods:
Some lenders offer promotional interest rate reductions during specific periods. Keep an eye on such opportunities and negotiate during these times to increase your chances of success.
For detailed documentation, you can request a
loan interest certificate. Additionally, explore ways to
reduce personal loan interest rate to further lower your financial burden.
Conclusion
Negotiating a lower interest rate can significantly reduce your loan burden, helping you save money in the long term. By improving your credit score, leveraging your financial relationship with the lender, and exploring refinancing options, you can successfully secure better loan terms. Additionally, staying informed about market rates and providing proof of financial stability enhances your chances. Be proactive in reviewing your options, and always look for opportunities to renegotiate during promotional periods.
