Lesson 3 of 3 · 8 min
When the rate resets
On a floating-rate personal loan, a benchmark move has to reach the borrower as a choice, rather than as a longer tenor nobody ever mentioned to them.
The quiet failure on a floating-rate loan is not the rate going up. It is the tenor going up. Keep the instalment the same and stretch the loan, and nothing on the borrower's bank statement changes — which is why people have discovered years added to a home loan without ever having agreed to it.
So when rates reset for a whole class of borrowers, the lender has to put the choice in front of the borrower rather than pick for them. Three things must be offered: a higher instalment, a longer tenor with the instalment unchanged, or a combination of the two; the option to switch to a fixed rate for the rest of the loan; and the option to prepay in part or in full at any point in the remaining tenor.
| Option | What moves | What stays still |
|---|---|---|
| Higher instalment | The monthly amount | The end date |
| Longer tenor | The end date | The monthly amount |
| A combination | Both, by less | Neither entirely |
| Switch to fixed | Certainty replaces the benchmark | The remaining principal |
| Prepay in part | The balance falls | The rate on what is left |
Two disclosures make this checkable rather than theoretical. At sanction, the all-in annual figure goes into the key facts statement and the agreement, along with the possible impact of a change in the benchmark. During the loan, any increase in instalment or tenor has to be communicated, and a quarterly statement has to disclose at minimum the principal and interest recovered so far, the instalment amount, how many instalments are left, and the annualised rate for the tenor.
How would I even notice a longer tenor?
KabirTara
Kabirasking
If the instalment does not change, how would anyone spot that their loan got longer?
Taraexplaining
From the quarterly statement. It has to say how many instalments are left. That number going up when nothing else changed is the whole tell, and it is the reason the statement has to carry it.
Kabirasking
And if I never opened those statements?
Taraexplaining
Then the first place you meet it is years later, which is how most people do. Four numbers, four times a year, is a small habit for the size of the thing it protects.
Check yourself
1 / 3
Kabir asks
On a reset, what must the lender offer?
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