Do you have loans with a high interest rate? Sometimes, these rates can actually come down because of certain RBI policies. One such policy is the repo rate cut. But what exactly is the repo rate? And how does it help you as a borrower? Let’s break it down step by step and see the effect of a repo rate cut on different types of loans.
What is Repo Rate?
The repo rate is the rate at which the central bank lends money to commercial banks for short-term needs, usually against government securities as collateral.
Think of it like this – Banks sometimes run short of cash. Then they go to the Reserve Bank of India (RBI) and borrow money. The RBI charges interest on this borrowing and that interest rate is the repo rate.
Now, why does it matter?
- Controls Inflation: If inflation is high, the RBI raises the repo rate. So, borrowing becomes costly, banks lend less, and spending slows down which leads to low inflation.
- Boosts Growth: If the economy is slow, the RBI lowers the repo rate. Then borrowing becomes cheaper, banks lend more, businesses expand, and growth picks up.
- Impacts EMIs and Loans: When the repo rate changes, banks adjust their lending rates. This directly affects your home loans, car loans, and EMIs.
How Does a Repo Rate Cut Affect Different Types of Loans?
1) Home Loans
Home loans are the most direct beneficiaries of a repo rate cut. This is because most banks today link their home loan interest rates to the Repo Linked Lending Rate (EBLR), which moves in line with the repo rate.
When the Reserve Bank of India reduces the repo rate, banks get funds at a cheaper cost. So, they pass on this benefit to borrowers by lowering their home loan rates. That means, a repo rate cut makes your EMIs lighter.
Imagine you have taken a home loan of ₹50 lakh for a tenure of 20 years. If the RBI cuts the repo rate by 0.25%, your home loan interest rate will also reduce by the same rate. Consequently, your EMI could fall by around ₹750 to ₹800 per month. This may look small at first glance. But over 20 years, the total savings add up to over ₹1.8 lakh.
2) Personal Loans
Personal loans are different from home loans. Because they come with a shorter tenure and a higher interest rate.
People take them to cover urgent needs like medical expenses, weddings, or travel. These loans are unsecured. So banks charge more interest to cover the risk.
When the RBI cuts the repo rate, banks can borrow funds at a lower cost. They may reduce personal loan rates slightly. However, the impact is not as strong as it is for home loans. Therefore, you should take personal loans only when necessary and always compare rates before applying.
3) Car Loans
Car loans also respond to repo rate cuts. But the impact depends on the type of interest rate chosen.
Many car loans come with fixed interest rates, which means the EMI stays the same throughout the tenure. In such cases, a repo rate cut will not make any change to your repayment.
But, if your car loan is on a floating rate, the story is different. Floating rates move in line with the repo rate or other benchmarks. So, when the RBI cuts the repo rate, banks may reduce the interest charged on these loans. Then your EMIs become cheaper, and the overall cost of borrowing falls.
Therefore, repo rate cuts can benefit you, but only if the interest rate is floating. If the loan is fixed-rate, there will not be any difference in your monthly outgo.
4) Business Loans
Business loans are highly sensitive to repo rate cuts. When the RBI reduces the repo rate, banks can access funds at a lower cost. In turn, they may offer cheaper credit to businesses. Then entrepreneurs will get enough funds for business expansion.
Lower borrowing costs directly improve a company’s cash flow. With lighter EMIs and lower interest rates, businesses can focus more on their business.
5) Credit Card Loans
Credit card loans work a little differently from other types of loans. Unlike home or car loans, credit card interest rates are not directly linked to the repo rate.
This means that even if the RBI cuts the repo rate, your credit card borrowing costs stay the same.
So, even if a repo rate cut will be a relief for home or business borrowers, credit card loans remain expensive. So, pay off your credit card dues and avoid cash advances unless it is necessary.
Final Words: Relief for Borrowers, Balance for Economy
A repo rate cut usually brings relief to borrowers. For most loan takers, it means lighter EMIs and easier access to credit. However, the impact is not the same across all loan types. So you should compare interest rates, check loan terms carefully, and borrow wisely.
