How does the interest rate for a flexi loan work?

A flexi loan, also known as a flexible personal loan, is an open-ended loan that functions like a credit card or line of credit. It does not have a fixed repayment structure.

• The interest rate on a flexi loan is variable and linked to an external benchmark set by  the Reserve Bank of India (RBI), such as the repo rate. When the RBI changes the benchmark rate, the interest rate on your flexi loan changes accordingly.
• Interest is charged only on the amount you have withdrawn from your sanctioned loan limit, unlike a term loan where interest accrues on the entire sanctioned amount. For example, if your flexi loan limit is ₹ 5 lakhs and you have withdrawn ₹ 2 lakhs, interest will be charged only on ₹ 2 lakhs.
• Interest needs to be serviced monthly. So, every month, interest is calculated on your outstanding flexi loan amount and needs to be repaid. The remaining principal amount can be repaid whenever convenient.
• Since it is an open-ended loan, you can make multiple drawdowns and repayments within the sanctioned loan period, usually set at a few years. Each time you make a fresh withdrawal, interest accrues on that additional borrowed amount.
• If you repay the entire outstanding loan amount and keep the account at nil balance, you do not need to pay any interest for that period. You can then make fresh withdrawals as needed.
• The flexibility of partial and multiple withdrawals and repayments makes flexi loans suitable for various short-term needs. However, the variable interest rate means your equated monthly instalments can fluctuate over the loan's tenure.