1. Your Credit Score Has Dropped
One of the most direct influences on your borrowing cost is your credit score, often referred to as your CIBIL score in India. Lenders use this three-digit number to assess your creditworthiness. A high score, typically 750 or above, signals that you are
a reliable borrower, and lenders are more likely to offer you lower interest rates. If you notice your score has dipped, it’s a major red flag. A lower score places you in a higher-risk category, and lenders will compensate for that risk by charging you a higher interest rate. Even a small drop can push you into a different interest slab, significantly increasing the cost of any new loan you take, be it for a car, a home, or personal expenses. Regularly monitoring your credit score is crucial; a sudden drop is a clear sign that future borrowing will be more expensive.
2. The RBI Is Increasing the Repo Rate
When you hear news that the Reserve Bank of India (RBI) has increased the repo rate, it’s not just abstract economic news—it has a direct impact on your wallet. The repo rate is the rate at which the RBI lends money to commercial banks. When this rate goes up, the cost of funds for banks increases. To protect their margins, banks pass this increased cost on to their customers by raising interest rates on loans, including personal, home, and auto loans. This is especially true for loans with floating interest rates, which are directly linked to these benchmark rates. An announcement of a repo rate hike is a strong indicator that the cost of borrowing across the board is set to rise, making any new loans more expensive and potentially increasing the EMIs on your existing variable-rate loans.
3. Your Variable-Rate EMIs Are Going Up
If you have existing loans with a floating or variable interest rate, an unsolicited increase in your Equated Monthly Instalment (EMI) is a concrete sign that borrowing costs are rising. Unlike fixed-rate loans, where the interest rate is locked in for the tenure, variable-rate loans are subject to change based on market conditions, often tied to the bank's lending benchmark, which is influenced by the RBI's repo rate. When lenders adjust their rates upwards, your EMI increases to cover the higher interest charges. This not only makes your current debt more expensive but also serves as a clear signal that any new loan you apply for will come with a higher interest rate than you might have secured just a few months prior. It reflects a broader trend of tightening credit in the financial system.
4. Lenders Are Offering You Less Favourable Terms
Another subtle but important sign is a change in the terms lenders are willing to offer you. Perhaps you applied for a top-up loan or a new credit card and were approved, but with a lower credit limit or a higher interest rate than you expected. Lenders constantly adjust their risk appetite based on the economic climate and their own cost of funds. If they perceive increased risk—either in the economy as a whole or in your personal financial profile—they will tighten their lending standards. This can manifest as less attractive loan terms, or even an outright rejection of your loan application. If you have a good credit history but are still being offered less favourable terms, it’s a strong indication that the overall cost of credit is on the rise.
5. Your Debt-to-Income Ratio Is High
Your debt-to-income (DTI) ratio compares your total monthly debt payments to your gross monthly income. Lenders use this metric to gauge your ability to manage new debt. In India, most lenders prefer a DTI ratio below 40-50%. If your DTI is creeping up, either because you've taken on more debt or your income has decreased, lenders will view you as a riskier borrower. A high DTI suggests you have limited capacity to handle additional payments, increasing the likelihood of default. Consequently, lenders may charge you a higher interest rate to compensate for this risk, or deny your loan application altogether. If you calculate your DTI and find it’s on the high side, it’s a personal sign that your cost of borrowing is likely to increase.
