Can the interest rate change?

Yes.

The interest rate can change if your loan facility has a floating or resettable rate.

A movement in the lender's benchmark, cost of funds or contracted spread can change the applicable rate prospectively.

A fixed-rate facility generally remains unchanged for the agreed period unless the contract allows a revision.

The lender should communicate any applicable change, and the Key Fact Statement or sanction letter explains the rate type and reset method.

First identify the rate type

There are three broad rate structures.

Fixed rate

A fixed rate remains unchanged for a defined period.

Floating rate

A floating rate moves according to a benchmark plus an applicable spread.

Hybrid rate

A hybrid rate may begin as a fixed rate and later become floating.

The type of rate is often more important than the advertised number because it determines how your future borrowing cost can change.

What a reset looks like

Suppose your facility is priced as:

Benchmark + 2.5% spread

If the benchmark is initially 7%:

7% + 2.5% = 9.5%

If the benchmark later rises to 7.5%:

7.5% + 2.5% = 10%

The loan rate may therefore reset from 9.5% to 10%, subject to the agreement.

Daily interest would then use the revised annual rate from its effective date.

Notice and disclosure

The loan documents should explain:

• The rate formula
• Applicable benchmark
• Spread
• Reset frequency
• Whether the rate is fixed or floating

The RBI Key Fact Statement framework requires important pricing and repayment information to be disclosed to the borrower.

How to prepare

Keep some headroom in your monthly budget and review notifications from the lender.

If rates increase, one way to reduce the impact is to lower the utilised balance.

Because LAMF interest is typically calculated on the amount actually used, reducing utilisation can offset some of the increase in the annual rate.

Compare the rate correctly

Ask the lender for:

• Annual interest rate
• Fixed or floating classification
• Benchmark
• Spread
• Reset frequency
• APR

Then estimate the monthly rupee cost based on your likely average utilisation rather than your maximum sanctioned limit.

A slightly higher rate with lower fees can sometimes be cheaper for short usage, while a lower rate matters more for larger or longer borrowing.

Information on this page is general in nature. Eligibility, approved schemes, LTV, rates and charges depend on the regulated lender's current policy and the final loan documents. This is not financial advice. The content is purely for educational purposes.