The Reserve Bank of India (RBI) plays a crucial role in shaping the economy through monetary policy decisions. One of its most significant tools is the repo rate, which directly influences borrowing costs across the banking sector. When the RBI decides to cut the repo rate, it sets off a chain reaction that affects personal loan interest rates, lending patterns, and overall credit availability in the market.
With the recent RBI repo rate cut, many borrowers are keen to understand how it will impact their existing and new personal loans. This article explores the implications of a lower repo rate, how banks adjust their lending rates, and what it means for individuals seeking personal loans.
Understanding RBI Repo Rate
The repo rate is the interest rate at which the RBI lends money to commercial banks. It is a critical tool in controlling inflation, liquidity, and economic growth.
♦ When the repo rate is increased, borrowing becomes expensive for banks, leading to higher interest rates on loans.
♦ When the repo rate is reduced, banks can borrow at a lower cost, leading to cheaper loans for consumers and businesses.
The repo rate directly influences personal loans, home loans, auto loans, and corporate loans, making it a crucial indicator for both borrowers and financial institutions.
Read More: Different Types of Banks in India
Impact of Repo Rate Cut on Personal Loan Interest Rates
The repo rate cut by RBI leads to lower borrowing rates at which banks take loans from RBI, which eventually impacts the MCLR rate of the bank, resulting in lower personal loan interest rates for end consumers.
1. Lower Borrowing Costs for Banks
When the RBI reduces the repo rate, banks pay less interest on funds borrowed from the central bank. This allows them to lower lending rates, making personal loans more affordable.
2. Reduction in MCLR and EBLR-Linked Loans
→ Marginal Cost of Funds-Based Lending Rate (MCLR): Banks reduce their MCLR in response to repo rate cuts, leading to lower interest rates on floating-rate loans.
→ External Benchmark Lending Rate (EBLR): Many personal loans are linked to the repo rate itself, meaning they see instant reductions when the RBI cuts rates.
3. Easier Loan Accessibility
As personal loan rates drop, more individuals can qualify for loans at lower EMIs, making credit more accessible for salaried and self-employed borrowers.
4. Increased Consumer Spending and Demand
A drop in personal loan rates encourages spending on big-ticket items like home renovation, travel, medical expenses, and consumer electronics, leading to an economic boost.
Impact of Repo Rate Cut on Fixed vs Floating Interest Rates
The fixed-interest rate loan refers to a loan with a fixed rate interest across the tenure, whereas, in the case of floating interest rates, the interest rate would vary across the loan tenure and is in accordance with the present loan interest rate. Let’s understand how the repo rate affects the fixed or floating interest rates.
♦ Fixed Interest Rate Loans
These loans have a constant interest rate throughout the loan tenure.
A repo rate cut does not impact existing fixed-rate personal loans.
Borrowers who have already taken loans at higher fixed rates will not see any reduction in their EMIs.
♦ Floating Interest Rate Loans
These loans are linked to repo rate, MCLR, or EBLR, meaning they change when the repo rate is revised.
Borrowers with repo rate-linked personal loans benefit immediately from an interest rate cut.
Banks generally pass the benefits of a repo rate reduction within 3-6 months in the case of MCLR-based loans.
Make the Better Choice
– If you expect further repo rate cuts, a floating rate loan is better as it ensures lower EMIs in the future.
– If you prefer stable EMIs, a fixed-rate loan may be better despite the higher interest rates.
In this context, it’s also important to understand flat & reducing balance personal loans and fixed vs floating interest rate personal loans.
Effects of Recent Repo Rate Cut on Personal Loans
The RBI’s latest repo rate cut of 25 basis points has prompted multiple banks to revise their personal loan interest rates. According to reports from Moneycontrol, several top banks have slashed their rates to make personal loans more attractive.
Updated Personal Loan Interest Rates from Various Banks
Here’s a list of updated personal loan interest rates after the repo rate cut:
Note: The interest rates mentioned above are indicative and may vary based on the applicant’s credit score, loan amount, and bank policies. Checking with the respective bank for the latest rates before applying for a personal loan is advisable.
Effect of Repo Rate Cut on EMIs
Lower interest rates directly reduce the EMIs on personal loans. For instance, a borrower with a ₹5 lakh personal loan at an interest rate of 12% over a 5-year tenure pays an EMI of approximately ₹11,122. If the interest rate decreases to 11% following a repo rate cut, the EMI reduces to about ₹10,870, resulting in substantial savings over the loan tenure.
Choice of Personal Loan After Repo Rate Cut
If you are planning to get a personal loan, then it is worth considering the pros and cons of opting for a fixed or floating interest rate. This is because the personal loans with floating interest rate and specially with reducing balance will help you save on EMIs & the total cost of the loan.
Check the pros & cons of repo rate impact on personal loans from below:
| Advantages of Repo Rate Cut | Disadvantages of Repo Rate Cut |
| Lower Interest Rates: Personal loan rates may decrease, making borrowing cheaper. | Not Always Immediate: Banks may delay passing on the benefits of a repo rate cut. |
| Reduced EMIs: If you have a floating rate personal loan, your EMIs could decrease. | Existing Fixed-Rate Loans Unaffected: Borrowers with fixed interest rate loans will not benefit from the rate cut. |
| Easier Loan Approval: Banks may offer loans more readily due to lower borrowing costs. | Eligibility Criteria May Tighten: Some banks may impose stricter lending criteria to manage risk. |
| Debt Becomes More Manageable: Lower interest rates reduce the overall cost of repayment. | Lower Savings Interest Rates: If you rely on fixed deposits or savings accounts for income, your returns may decrease. |
| Encourages Refinancing: Existing borrowers may get better deals by switching lenders at lower interest rates. | Inflation May Increase: If inflation rises, the cost of living could go up, reducing the benefit of lower EMIs. |
| Pro Tip:
In the case of a floating-interest rate personal loan, the repo rate cut will lead to reduced EMIs; however, instead of opting for a reduced EMI, you can opt for a reduced tenure rate at the existing EMI. This will help you to close your loan faster and save on your total loan expense. |
Conclusion
The recent RBI repo rate cut is a golden opportunity for borrowers seeking personal loans at lower interest rates. Whether you’re a new borrower or an existing floating-rate loan holder, this is the ideal time to reassess your financial strategy and leverage lower borrowing costs.
For the best deals, compare loan offers, negotiate with lenders, and ensure you have a good credit score. As banks adjust their rates to reflect the repo rate cut, taking a well-planned loan decision can save you thousands in interest payments.
If you’re considering a personal loan, now is the time to act smart and borrow wisely!
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Frequently Asked Questions
What happens if RBI reduces repo rate?
When the RBI reduces the repo rate, borrowing becomes cheaper for banks, leading to lower lending rates. This encourages loans and spending, boosting economic growth.
How do repo rate cuts affect loans?
Repo rate cuts reduce loan interest rates, especially for floating-rate loans, making personal loans, home loans, and other credit facilities more affordable.
Are personal loan interest rates affected by repo rate cut?
Yes, floating-rate personal loans are directly affected. Banks may lower their interest rates for new and existing loans linked to EBLR (External Benchmark Lending Rate).
What is the relationship between repo rate and interest rate?
The repo rate determines how much banks pay to borrow money from the RBI. When it decreases, banks pass on the benefits by reducing lending rates, making loans cheaper.
What is the personal loan interest rate after the repo rate cut?
Interest rates vary by bank, but major banks have reduced personal loan rates by 0.25% to 0.50% following the RBI’s latest repo rate cut. Check your bank for updated rates.
Is personal loan interest rate fixed or floating?
It can be either fixed or floating. Fixed-rate loans remain unchanged, while floating-rate loans fluctuate based on repo rate and other market factors.
What is a good interest rate for a personal loan right now?
A good personal loan interest rate currently ranges between 9.75% to 13.50%, depending on your credit score and bank policies.
Is 12% a good rate for a personal loan?
Yes, 12% is considered a decent rate, especially for unsecured personal loans. However, borrowers with high credit scores may qualify for lower rates.
Is it better to reduce EMI or tenure on a personal loan?
Reducing tenure saves on interest but increases EMI. Lowering EMI reduces monthly burden but increases total interest paid. Choose based on financial flexibility.
Is it possible to reduce personal loan interest rate?
Yes, by negotiating with your bank, improving your credit score, opting for repo-linked loans, or transferring to a lower-rate lender, you can reduce interest costs.
How can I lower my interest rate on a personal loan?
- Improve your CIBIL score (750+)
- Compare different lenders
- Choose a shorter tenure
- Negotiate with your bank
- Opt for repo rate-linked loans
- Transfer your loan to a lower-interest bank (balance transfer)
