Rising interest rates: should you borrow or delay festive season purchases?

Following the US Federal Reserve’s move to raise benchmark rates in September, the Reserve Bank of India announced an increase of 25 basis points in the policy repo rate on 7 October. Typically, such increases signal that interest rates are set to rise for a range of financial products, including loans and deposits.

Big-ticket corporate loans follow their own evaluation dynamics regardless of rising or falling rates. Consumer credit, however, reacts almost immediately to changes in interest rates and thus has a real-time impact on our day-to-day living standards. What should you buy? Property, vehicle, jewellery, electronic items, travel? And equally importantly, when should the purchase be made?

The timing of the recent increase coincides with enhanced consumer spending, which is the usual concomitant of any festive season. Online and offline retailers offer their best deals during this period to capitalise on higher customer spending. On top of that, lenders make life more exciting by providing quick and easy loans to drive spending during the auspicious season. Not to miss out on the festivities, credit cards also offer instant discounts on purchases with low- or zero-cost EMIs.

The increase in interest rates will not only impact new borrowers, but existing loan EMIs will also increase for loans linked to the benchmark interest rates. Consequently, you may then find less money available to splurge during the festive season. Do consider delaying non-essential spending.

The purpose of your intended borrowing has a direct bearing on the decision whether taking on debt is a good idea. Several banks run special festive offers where they provide discounts on processing fees, lower interest rates and enhanced tenures. If you have decided to borrow, you should make the most of the seasonal offers, thereby lowering the overall cost of your loan.

Although it is different strokes for different folks, scenarios where a loan makes sense for most individuals:

• While buying an asset, always ensure that loans add value to your life. Buying a home is usually a great idea, since it not only saves on immediate rental costs but also provides long-term appreciation and also serves up a sense of mental security.
• Festive offers can provide an excellent opportunity for savings through debt consolidation. A process where multiple high-interest loans are combined into a single loan at a lower interest rate. For example, multiple credit card outstandings and high-interest personal loans can be grouped into a single loan at a lower interest rate via a gold loan, or a more efficiently priced personal loan.
• Festive season or not, medical emergencies and accidents come unannounced. When there is an inadequate emergency fund, a swiftly disbursed personal loan can help in settling your immediate medical expenses. In recent times, personal loan disbursals have well & truly come of age, and can be remitted to your bank in a couple of hours.

It is always a good idea to check and compare the available options to ensure you get the best deal available. Marketplace platforms do allow you to easily compare the overall costs involved, not just the headline interest rate. Customers should always evaluate the flexibility offered by the loan provider regarding penalty-free part-payments and premature loan closures.

Customers should rationally identify their individual requirements and thus avoid falling into a debt trap owing to a combination of enticing retail offers and easy credit available at favourable terms. During the festive season, it is almost incumbent upon most of us to somehow throw caution to the wind. An impulsive purchase of non-essential items should be avoided, as the total outlay can be higher than what was initially planned and may, therefore, place a burden beyond your repayment capacity. This is especially true in a rising interest rate environment.

The current 0.25% increase in benchmark lending rates may dampen the mood around certain credit-led purchases. However, a much larger impact on consumer demand will be caused by macroeconomic factors – a combination of inflation, contraction of disposable household incomes, diminishing consumer sentiment and reducing availability of cheap credit.

Looking ahead, we can be almost certain of additional increases in repo rates and the consequent hikes in cost of loans. Global headwinds will continue to create unrelenting inflationary pressure, and coupled with the artificial intelligence-led disruptions, we will face unexpected challenges. We should factor in these uncertainties while making decisions around our future financial commitments.

Raj Khosla is managing director, MyMoneyMantra. Views are personal.