How do changes in interest rates affect my existing personal loan?

The effect of interest rate changes on your personal loan depends primarily on whether your loan carries a fixed or floating interest rate. If you have opted for a fixed interest rate, your repayment schedule remains steady throughout the entire loan tenure. This means that your EMI as well as the total interest payable are locked in from the outset regardless of any fluctuations in market rates or changes in the Reserve Bank of India’s policy rates. This predictability can be reassuring, as you know exactly what your monthly outgo will be until the loan is fully repaid.

On the other hand, if your personal loan is linked to a floating or variable interest rate, your repayments are directly influenced by changes in market benchmarks, such as the lender’s base rate or the RBI’s repo rate. When the benchmark rate rises, your loan interest rate is likely to increase as well. This can result in a higher EMI or, in some cases, an extension of your loan tenure if you wish to keep the EMI unchanged. Conversely, if there is a reduction in the benchmark rate, your EMI could decrease, or you might be able to repay the loan faster if the tenure is shortened.

It is important to review your loan agreement to determine which type of interest rate applies to your loan. If you are concerned about rising rates and the impact on your monthly budget, you may consider discussing refinancing options with your lender. Refinancing lets you to switch to a loan with a lower interest rate or more favourable terms if market conditions have changed or your credit profile has improved. However, always factor in any processing fees or penalties before making such a decision.