Since a personal loan requires no collateral, it enhances the credit risk level for lenders. Thus, interest rates on such loans tend to be steep. Increased rates of interest also mean higher equated monthly instalments (EMIs).
A reduction in the EMI outgo can ease your financial burdens. Therefore, you need to be aware of factors that influence your EMIs, so you can become debt-free faster. The repo rate is one such factor, and here is an explanation of how it affects your loan EMI.
What is the repo rate?
Financial institutions raise funds through various channels. They then lend out this money and enjoy profits on the lending interest. The central bank of the country is one such source of funds for them to borrow funds. The financial companies and commercial banks also approach the central bank for financial help when they face any shortfall in running their regular operations. The repo rate is the rate at which the central bank, i.e., the Reserve Bank of India (RBI), lends money to these financial institutions.
How does the repo rate impact personal loans?
Every loan EMI contains two components – the principal and the interest. A reduction in the repo rate decreases the cost of funds for commercial lenders. As a result, they can advance loans to their customers at lower interest rates. Thus, if you apply for personal loan when the repo rate is low, you can enjoy economical EMIs.
Likewise, when the repo rate increases, financial institutions acquire funds from the RBI at higher prices. In turn, this forces them to provide loans to their customers at higher rates. Thus, EMIs become higher, making loans costlier for customers.
Additional Read: Top Factors Affecting Your Personal Loan Interest Rates
Does a low repo rate translate to a smaller personal loan EMI?
2019, RBI instructed banks to convert all floating rate retail loans, including
personal loans, to an external benchmark. The repo rate was one of the four
parameters specified by the RBI. This regulation aimed to ensure the effective
transmission of repo rate benefits.
Thus, banks choosing the repo rate as the benchmark have to reset their personal loan interest rates according to changes in repo rates. This new regulation benefits not just new borrowers but also existing borrowers. If the RBI lowers the repo rate by 40 basis points, say from 4.4% to 4%, you can expect your lender’s repo-linked lending rate (RLLR) to go down by 40 points as well. So, with a repo-linked loan, you can be assured your EMI will be more affordable.
Additional Read: 5 Ways To Manage Your Personal Loan Emi Payements
You can check the new value of the EMI by using an online personal loan EMI calculator. However, you must remember that your loan will also witness a quick increase in interest rates with a hike in the repo rate.
Under the new repo rate regime, personal loans are set to become cheaper. If you need funds, you can consider availing a loan from a reputable lender that prioritizes customers’ benefits. Tata Capital offers personal loans to both salaried and self-employed individuals at attractive interest rates. Check your personal loan eligibility on the official website and apply online to cover any shortage of funds.