Personal loans are unsecured loans, which means there is a higher credit risk for lenders. Hence, interest rates on personal loans are typically high, resulting in higher EMIs. It is essential to understand the factors that impact your loan EMI so that you can manage your finances better and pay off your debt quickly.
The repo rate is one such factor that affects your loan EMI, and it is crucial to know how it impacts your loan payments.
What is repo rate?
Repo rate stands for ‘Repurchasing Option’ rate, which is the rate at which the Reserve Bank of India lends money to commercial banks. It is a tool the central bank uses to regulate liquidity in the economy. When the repo rate is high, borrowing from the RBI becomes expensive, and borrowing becomes cheaper when the repo rate is low. The RBI uses this tool to control inflation and encourage economic spending.
How does repo rate impact your personal loan EMI?
Personal loans are not backed by collateral. Therefore, they are riskier for banks to lend, so the interest rates on personal loans are generally higher than other loans. The interest rate on personal loan is the primary factor determining the EMI (Equated Monthly Installment) you must pay each month. And an easy way to calculate your personal loan EMI is by using a personal loan EMI calculator. A personal loan EMI calculator is an online tool that helps you calculate your monthly EMI based on your tenure, loan amount, and interest rate.
Repo rate indirectly affects personal loan interest rates. When the RBI reduces the repo rate, the cost of borrowing for commercial lenders decreases. This leads to reduced interest rates that lenders charge their customers for personal loans. So, if you have a personal loan, a reduction in the repo rate can lower your EMI.
However, it’s important to note that the repo rate is just one factor influencing the interest rate on personal loans. Other factors that impact personal loan interest rates include your credit score, income, employment status, loan amount, loan tenure, and the lender’s policies.
What should you do if the repo rate changes?
If the repo rate changes, keeping an eye on your personal loan interest rate and EMI is important as even a small change in the repo rate could make huge changes in your monthly installments. And at times like these, you can make use of tools like a personal loan EMI calculator to plan ahead and make robust financial plans so that such changes in the macro and micro policies do not have a severe impact on your overall finances.
In conclusion, it is important to keep yourself abreast with the latest developments and policies announced by the RBI as these could have ramifications on your personal loan.