How the RBI repo rate cut impacts personal loan borrowers—Find out

Personal loans are a popular choice for people who are in need of funds but do not own high net worth assets to provide as collateral. These loans offer quick disbursement and minimal paperwork. The interest rates offered in personal loans are generally higher than that of other loans available in the market. Repo rate cuts by the Reserve Bank of India (RBI) have a direct impact on personal loan interest rate and EMIs (Equated Monthly Installments).

Understanding repo rate

The interest rate at which the RBI lends to commercial banks is called repo rate. If a cut in this rate occurs, borrowing costs will decrease for banks, and with that, lending rates for consumers may also fall.

Effects of repo rate cuts on personal loans

Lower interest rates: There is a possibility of the banks lowering the personal loan rates after the repo rate cut.

Reduced EMIs: Lower interest rates result in lower EMIs per month.

Quick lending: During the rate cuts, Lenders may bring in quicker Loan Offers to attract borrowers.

Impact based on interest rate type

Fixed interest rate: Repo rate changes don’t affect these loans as the rate is fixed.

Floating interest rate: If you have taken a loan with floating rates, you can enjoy direct benefit because your loan’s interest rates are dependent on market rates. Hence, repo rate cut will reduce your interest rate ultimately reducing your EMI.

How RBI’s repo rate cuts can reduce loan EMIs

Lower borrowing costs for banks: If RBI cuts the repo rate, then banks can borrow money from RBI at a lower rate.

Impact on interest rates: Along with the repo rate, the External Benchmark Lending Rate (EBLR) is largely responsible for the interest rates (repo) of most bank loans, such as personal, home, car, MSME and other floating rate loans.

Direct reduction in loan rates: As the repo rate is the key EBLR, any cut leads to reduction in the rates of interest on loans being linked to this benchmark.

Lower interest rate: This benefit helps new and existing borrowers with floating rate loans to reduce EMIs.

Individual bank policies: Bank policies vary in the extent of the reduction passed on to borrowers, some banks passing the full reduction, while others only partially.

In conclusion, repo rate cuts can also drastically reduce borrowing costs for you if you are on floating interest rates. Benefits vary across the loan type, benchmark rates and lender policies. During periods when repo rates are at low rates, staying informed and comparing loan offers is what helps you bag the best rates.

(Note: Raising a loan comes with its own risks. So, due caution is advised)