Personal loans have turned out to be a necessary financial support for households across the country for a variety of reasons such as home repairs, medical needs and education costs. Yet there is one thing that plays on borrowers’ minds, which is when their EMI amounts fluctuate. These fluctuations in payments are related to the repo rates governed by the Reserve Bank of India (RBI). Typically, lending institutions adjust their lending rates based on changes in key policy rates, such as the repo rate and their internal cost of funds.

The repo rate, or policy rate, is set by the RBI and it is important to understand how all of this affects your monthly repayments. This is important for your own financial planning and for your peace of mind to ensure EMIs continue to be affordable during the loan agreement.

This blog post will explain what repo rates actually are, why they change and how RBI repo rates impact the EMIs of your personal loan.

What is the RBI Repo Rate and Why does it Change?

The repo rate is the rate at which the Reserve Bank of India lends to commercial banks and lenders. The repo rate is a monetary policy tool to control inflation, control liquidity and manage economic growth. If inflation rises, the RBI will increase the repo rate. The lenders ultimately pass this cost on to their customers by increasing their interest rate on personal loans. This will affect the amount you pay every month (EMI). Similarly, when the economy is slowing down the repo rate will be decreased in order to reduce the cost of loans and encourage spending.

Direct Impact of Repo Rate Changes on Personal Loan EMIs

Changes in the repo rate will typically flow from the RBI to lenders, and ultimately to you, the borrower. If the repo rate increases, the cost of lending to lenders will also increase. The lenders are usually forced to also increase their interest rate on personal loans in order to sustain their profit margins. If the EMI increases, you (the borrower) will be paying more each month, making the loan more costly. For example, if you took out a loan of ₹5 lakhs at an 11% interest rate with 48 months as the loan tenure, you would pay approximately an EMI of ₹13,000 (floating interest rate). An increase in repo rate led to an increase in the interest rate to 12%; your EMI could rise to ₹13,200 or higher.

Conversely, if the repo rate were to decrease, in roughly the same manner, the lenders can buy more cheaply from the RBI, and can offer their customers loans at lower interest rates, which lowers your EMI costs.

However, when there is a change in repo rate, the actual impact depends on the loan type and how quickly the lender passes on these rate changes.

Floating vs. Fixed Interest Rates and Repo Rates

Personal loans can come at fixed or floating interest rates, and repo rate changes will affect the two differently.

Fixed-rate loans will have the same interest rate for the tenure of the loan and EMIs will not change even when the repo rates change. This means that you will have the same EMIs every month giving you peace of mind in terms of your repayment.

With floating rate loans, these loans are linked to the benchmark market rates and are subject to repo rate changes. Therefore, when the RBI raises or decreases the repo rate, floating rate loans will typically have the EMIs increased or decreased within a few months.  However, depending on the lender’s policy, either the EMI or the tenure is revised.

Other Factors Influencing your Interest Rates

The main influencing factor was your credit score. Loan tenure, income stability and bank approval and lending policies will also influence personal loan interest rates.

These combined elements contribute to what is termed personal loan interest rate fluctuations.

Therefore, even if the repo rate remains constant, your personal circumstances and lender decisions may cause your interest rates to vary. Staying aware of these factors can help you manage your loan effectively.

Related Reading: For a more expansive consideration on what determines your personal loan interest rate there are factors influencing your personal loan interest rate beyond credit score.

How Borrowers Can Prepare for Repo Rate Changes

Tracking repo rate announcements is a relevant and important activity for borrowers to consider especially if they have a floating-rate personal loan. The Reserve Bank of India (RBI) generally announces any repo rate changes through their scheduled monetary policy meetings. After knowing the repo rate has changed, borrowers monitoring their EMIs over time should prepare for the possibility that their EMIs may be influenced by repo rate changes.

If you are mindful of an increasing EMI, you will be less likely to experience restrictions in your monthly cash flow and can plan money management better. Likewise, for those expecting a decrease in repo rates, it may also be useful to check in with the lender on when the reduced rates should be reflected, as sometimes lenders take time to issue RBI rate cut effects on EMIs immediately post announcement. .

Conclusion

Knowing the relationship between repo rates and EMI of personal loans is important. Being aware of repo rate movements and understanding the type of loan you have will certainly help you better financially plan your borrowing. The RBI is using the repo rate to control the economy as a whole and its decisions will impact on your EMIs. This will directly affect your monthly budget, expenses etc.

By being alert and informed, as a borrower, you are able to deal with those fluctuations better and at the very least you can make better borrowing decisions. This will ultimately benefit your financial well-being if you consider your loan repayment strategy with these broader economic factors in mind.

FAQs

What is the repo rate set by the RBI, and why is it important?

The repo rate is the rate at which the central bank lends money to banks and lenders. It is subject to variation as it depends on the economic conditions. It has a very significant impact on the borrowing costs.

When the RBI repo rate rises or falls, what will happen to your personal loan EMIs?

Any change in repo rate could affect interest rates, EMIs, loan amount and so on. But it will depend on the lender policies and the loan contract whether they will even change the rates or the loan tenure.

If the repo rate has increased will I be faced with higher loan EMIs?

For new loans, yes. However, for a loan on a floating rate basis, either the EMI or the loan tenure is revised based on the lender’s policy. If the repo rate increases, the total interest amount will also increase.

How long does it take a lender to let me know if the repo rate goes up or down?

It could take your lender some time to pass on their changes to the RBI's repo rate and the rates applicable to personal loans. However, how quickly each lender passes on the change to their borrowers is entirely dependent on their own policies and protocols.

Can I pay off my personal loan early to avoid paying more in EMIs?

Prepayment can help you deal with changes in the interest rate on your personal loan, but you should talk to your lender about how and if you can prepay the personal loan. Also, find out what fees there may be for paying off personal loan early.

When the repo rate goes up or down, what should borrowers do?

Since there is a possibility of changes in EMIs, it is necessary to read the loan terms, track the repo rate changes and seek advice to manage repo rate hikes and loan repayments.