Taking out a personal loan can be a lifesaver in times of financial need. But have you ever wondered why interest rates on personal loans can change over time? One major factor behind these fluctuations is the repo rate. So what exactly is the repo rate and how does it affect the interest of a personal loan?
What is the Repo Rate?
The repo rate, short for ‘repurchase rate,’ is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks in the country. In simple words, it is the cost banks pay to borrow money from the RBI.
How Does the Repo Rate Influence Lending Rates?
The repo rate directly impacts the interest rate fluctuations on loans, including personal loans. When the RBI increases the repo rate, banks face higher borrowing costs. To reduce these costs, banks pass on the burden to borrowers by increasing lending rates. This means your personal loan rate may rise.
On the other hand, when the RBI cuts the repo rate, banks benefit from reduced borrowing costs. As a result, they may lower lending rates thus making personal loans more affordable.
However, banks don’t always pass on repo rate changes immediately or fully. Other factors, like market competition and their financial health, can also influence lending rates.
Repo Rate Hike vs. Repo Rate Cut
Understanding repo rate hikes and repo rate cuts can help you decide the best time to apply for a personal loan.
Repo Rate Hike
When the RBI increases the repo rate:
- You will likely pay more interest on new loans.
- If you have a floating interest rate, your monthly installments may go up.
- Higher costs discourage borrowing, which can slow the economy.
Repo Rate Cut
When RBI decrease the repo rate:
- Loans become more affordable, especially for new borrowers.
- Floating-rate borrowers may see their EMIs decrease.
- Lower rates often encourage people to take loans, boosting economic growth.
Fixed vs. Floating Interest Rates and Repo Rate
When taking out a personal loan, you can choose between fixed and floating interest rates. Here’s how each is affected by repo rate changes:
Fixed Interest Rates
With fixed rates, your loan’s interest rate remains constant throughout the tenure. Repo rate changes won’t impact your loan’s interest or EMIs but may not be beneficial if rates decrease.
Floating Interest Rates
Floating rates are tied to market-linked benchmarks, often influenced by repo rate changes. If the repo rate increases, your interest rate and EMIs may rise. Similarly, a decrease in the repo rate could reduce your loan costs. Floating rates are ideal if you are okay with some risk and expect falling rates.
How Repo Rate Changes Affect Personal Loan Borrowers
Repo rate changes can have a significant impact on your personal loan experience:
For New Borrowers:
- A higher repo rate means you will likely pay a higher interest rate on your loan.
- A lower repo rate makes borrowing cheaper, giving you loans at reduced rates.
For Existing Borrowers with Floating Rates:
- Your EMIs will rise if the repo rate increases.
- If the repo rate drops, you may get lower EMIs or reduced loan costs.
For Existing Borrowers with Fixed Rates:
- Your loan terms remain unchanged, regardless of repo rate fluctuations.
Conclusion
When you are planning to take a loan, it is important to keep an eye on the current repo rate set by the RBI. CASHe provides instant personal loan to fulfill each and every one of your needs! Loans are disbursed from 9 months, all the way up to 1.5 years, depending upon your needs. CASHe ensures that cash is made possible, whenever, and wherever!
