How Does Repo Rate Affects Interest Rates of Personal Loans?

Do you know how the repo rate increase affects your personal finances? When you apply for a loan, lenders levy an interest rate. However, this isn’t a random number but a carefully calculated rate based on the prevailing repo rate and the institution’s policy.

Here are some essential points that you need to know:

• The repo rate is the rate of interest at which financial institutions borrow funds from the RBI. 
• The Reserve Bank of India (RBI) decides this rate based on many economic factors. 
• Since it impacts the lender’s borrowing cost, it indirectly affects your personal finances, too. 
• Currently, the repo rate fixed by the RBI is 6.50%. 

What is a Repo Rate?

The repo rate or ‘Repurchase Rate’ means the interest rate at which the Reserve Bank of India gives money to NBFCs and Banks in India. So, the cardinal rule is that the higher the repo rate, the higher the interest rate. Knowing this beforehand helps you better understand the repo rate effect on a personal loan and other forms of credit. 

How are Personal Loan EMIs Affected by the Repo Rate?

Thinking how does repo rate affects the interest rates of your personal loans? Generally, the RBI increases the repo rate to combat high inflation. If the RBI wants to increase the circulation of money in the economy, it lowers the repo rate. On the contrary, if the RBI wants to reduce borrowing by banks, it increases the rate to minimise the liquidity in the market.

So, an increase in the repo rate affects a personal loan, as well as business, home and other loan interest rates. Since interest rates have a direct effect on your EMI amount, an increase in the repo rate will also increase your EMI. 

On the other hand, lenders borrow funds at a lower interest when the RBI reduces the repo rate. In such cases, the interest rate also lowers as they offer loans at a lower rate. 

Simply put, a cut in the repo rate decreases your loan EMIs while an appreciation in the repo rate will increase your loan EMIs.

What are the Factors Affecting Your Personal Loan EMI?

In addition to the repo rate effect on a personal loan, here are some other factors that affect your interest rates and EMIs.  

Credit Score

Lenders charge a higher interest rate if you have a low credit score to mitigate the risk of providing the loan. If you apply with a good credit score, you can get credit on favourable terms, thereby minimising your borrowing costs. 

Loan Amount 

A higher loan amount also increases the risk for lenders. To enjoy lower EMIs and affordable interest rates, borrow only the amount you need. 

Repayment Tenure 

Interest rates and tenure have a reciprocal relationship; as one increases, the other decreases. Opting for a longer tenure will decrease your EMI, but remember that your interest payment will increase over the tenure.

Debt-to-Income Ratio 

Lenders may hesitate to provide your loan at a lower interest rate if you already have an ongoing loan. However, if you have a good score, lenders can rest assured of your repayment capability and may consider your loan application on favourable terms.

Your Net Income 

Showing a higher income is one way to opt for a lower interest rate on your personal loan. Generally, lenders prefer employed individuals with steady work experience. 

Lender-borrower Relationship

When you apply for a loan with an existing or past borrower, they have your record of repayment history. Based on that, you can get a personal loan at a lower interest rate, decreasing your loan EMIs.

In conclusion, the repo rate changes based on the economic situation and RBI monetary policies. Hence, apply for a loan when the repo rate is lower as interest rates will be more affordable. 

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FAQs on How Repo Rates Affect Personal Loans

Does the repo rate affect personal loans?

Yes! This rate set by the RBI affects the interest rate offered by the lender. This way, it has a direct effect on your personal loan as well as other types of credit. 

How does a hike in repo rate affect your personal finances?

When the RBI repo rate for personal loans increases, the cost of borrowing subsequently increases. Thus, if you have a floating interest rate loan, your EMI will increase with the hike in the repo rate. 

Is the increase in the repo rate good or bad?

An increased repo rate has many pros and cons. For example, the interest rate on loans may increase, but individuals with FDs and savings can get better returns.