How the RBI’s Hike in Repo Rate Impacts Loans

Updated on: 14 Dec 2021 // 22 min read // Personal Loans
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If you are repaying a Home Loan or are willing to apply for a Personal Loan online, this news is for you. Since a fixed rate of interest is payable only for a specified period; your lender can revise the rate of interest after the specified duration, thus affecting your monthly instalment. This rate of interest is also dependent on the repo rate fixed by the Reserve Bank of India (RBI). Any changes in the same can make you pay a different amount than you were paying initially.

The market, on the whole, gets influenced by any change in repo rate – be it the lender, the borrower or the depositor – everybody has to reconsider their financial planning. RBI has recently revised the repo rate (the rate at which the RBI lends money to commercial banks) after an extended period of four years. Because of inflation and rise in oil prices, a hike of 0.25% in the repo rate was announced by RBI making the repo rate 6.25% from the previous 6.00%. This increase was quite an expected one since the fuel prices touched the highest ever limit. Let us discuss how it is going to influence your budget, especially if you are looking for Personal Loan offers and other credit.

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Repo rate is the rate of interest RBI charges from banks when it lends money to them. The banks, in turn, give this money to people seeking loans and charge above this rate from them. It applies to new borrowers as well as the existing ones. So those paying an EMI (Equated Monthly Instalment) shall find a slight increase in the rate of interest which is being charged by the bank. Many financial organisations, by minutely analysing the market trends, have already raised their prices. SBI and Axis bank has hiked the deposit rates, as well as, the lending rates, in general, have been already increased. The move is going to influence your EMI for a Personal Loan, car loan as well as a Home Loan.

Since Home Loans generally have a floating rate of interest, the maximum impact of the hike shall be on those borrowers who are repaying the Home Loan since the amount of a Home Loan is generally higher than any other credit. However, car loans or Personal Loans too may show an increase, but in a situation like this, it is advisable to go only for short-term loans like Personal Loans. Since the amount is low, the impact on percentage is little too. Take an example, 1% of 1 Crore is 1 Lakh, but 1% of 1,000 rupees will look smaller. However, the rate is same for both. The change in repo rate is not necessarily a decision about which you should feel sorry. It can help to cushion the value of rupee in the international market and cater to the domestic market distress.  The increase of 25 basis points also suggests that RBI is and will remain vigilant towards retail prices in the coming months. The affordable housing in the real state sector will receive a boost as loans up to 35 Lakhs will be considered a priority by the banks. Overall, this hike is beneficial for economic growth.

There are speculations about another hike by RBI in the second half of this year, probably August or October. Experts advise that instead of worrying about the change in market conditions, the investors must stick to the short period investments and actively look for credits. What the outcome of the rise will be, shall be known in a couple of months. If the growth anticipated will be substantial to compensate for the price hike or the strategy won’t work as planned. As a borrower, it is for sure that you will be paying an EMI greater than the actual figure, but what are the things that can be done to negate any adverse impact of the hike?

1.  Wait for your lender to inform you about any hike in the EMI you have been paying. Not all the loans work on the same principle; your loan type can be a different one with a model that protects you from this hike, you need not bother at all. For example, if you took a loan just a few months ago, and you opted for a fixed rate of interest then, there is not going to be any revision in your EMI for tenure of five years. Know your loan inside out before jumping to any conclusion.

2. If your interest was affected by the hike, and the change is substantial, you can always go for refinancing the loan. Changing the lender can prove to be a right decision as offers in different banks offer different benefits. However, you may not witness an exceptional rise in monthly payments of your debt; this hike will show a significant change when you calculate the long-term interest that you will pay on the principal amount.

3. If you have just started paying your loan, a pre-payment can safeguard you from the hike, but the same is not advisable for people who are near the verge of completion of the repayment. Just wait and watch if you are not sure of what you should do.

The changes in the market are always going to be there, maintain your credit score, look for best deals, choose short-term loans like Personal Loan offers, over long-term debts and while Applying for a Personal Loan Online or refinancing existing debt, understand the vitals of your finance management.

Also read:  Using a Personal Loan for Making a Home Loan Down Payment?

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