FINANCE

Does Repo Rate Impact on Personal Loan EMI?

Unsecured loans like personal loans are one of the best solutions for people who are looking for funds to meet their emergency financial requirements. This is because as a borrower, you don’t need to pledge any collateral or security with the lending institution. The lack of a collateral means higher risk for the lender, which is why the interest rates associated with personal loans are generally quite high. This results in higher EMIs (Equated Monthly Instalments). These unsecured loans are easy to apply and get approval on it. One can use these amounts as per the requirements i.e, fund a wedding, medical bills, buying electronics, traveling, home improvement, holiday, paying school and tuition fees.

Let’s say you have applied for a personal loan after calculating the EMIs using a personal loan EMI calculator. Yes, it is good to calculate the EMI first before applying for the loan but, are you aware of the factors that could affect your EMIs? Although there are numerous factors which affect the EMI like, change in interest rate, tenure, changing loan lenders, income, repayment history, customer relationship etc. Repo rate is one of the strongest factors all among them.

Repo rate is one factor that you need to be aware of as it can impact your EMI. Most of the borrowers are familiar with the term “repo Rate”. If you do not know what it is, this article can help you in understanding the basics of Repo rate and its impact on your personal loan EMI. 

What Is Repo Rate?

Repo rate (repurchase rate) is the rate at which commercial lenders borrow funds from the RBI (Reserve Bank of India) against collateral to meet fund shortages. This is the main tool that helps the Reserve Bank of India in controlling inflation. Lenders use these funds to lend out money and gain profits on the interest. Basically the main purpose of the repo rate is to control the control inflation.

How Does Repo Rate Affect Personal Loans?

The impact of a change in repo rate on personal loans is drastic. With a drop in this rate, personal loans would get more affordable for individual borrowers as well as corporates. This, in turn, increases the demand as well. With a surge in repo rate, borrowers get hesitant to apply for a personal loan. In either case, the borrowers are the ones who tend to get affected by the change in repo rates. 

How Does a Change in Repo Rate Affect Personal Loan EMI?

Any personal loan EMI has two parts i.e. the principal amount and the interest amount. If there’s a cut in the repo rate, it decreases the cost of funds for lenders. So, they can approve loans for borrowers at lower rates of interest. So, if you want to benefit from lower EMIs, it would be a wise decision to apply for a personal loan when the repo rate is low. A reduction in the repo rate would mean a reduction in the interest rates only if the loan has been given on the basis of floating rates of interest. If it is on the basis of fixed interest rates, then the reduction or repo rate will not affect the interest rates or EMI. So, cuts in repo rates will be beneficial for new borrowers once the lender implements the changes. However, existing borrowers who have already chosen fixed interest rates would not be able to gain from it.

On the other hand, when there’s an increase in repo rate, lenders need to pay higher prices to the RBI to get funds. What happens to personal loan EMIs when the RBI increases the repo rates?  This, in turn, coerces the lenders to give loans at high interest rates. So, personal loans could get costlier for borrowers. In this case as well, only those loans provided on floating interest rates are affected. 

While applying for a personal loan, if you get to know that there’s a change in repo rate, you can quickly use a personal loan interest calculator to get to know how this change affects your EMIs. Based on what you figure out, make a well-informed decision. Because the effect of repo rate is both good or bad. Hence, must check the EMI calculator and calculate the amount.

Hence, there are advantages and disadvantages of lower and higher repo rate through the tenure of the loan, there is a wide rise in the personal loan apply process as compared to the other loans like, property loan, business loan, care loan etc.

The financial institute you choose should be ready to pass on the benefits of reduction in repo rates to its customers. If you need funds for emergency needs, do consider availing a personal loan from a reputed lender that gives importance to the benefits of customers.

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