Following the decision of the RBI to slash repo by 40 bps, the current repo rate stands at 4%. Notably, repo rate meaning states that it is a rate at which the RBI lends funds to financial institutions. As it serves as an external benchmark, the interest rate of multiple financial products, including housing loans, are dependent on it. This directly influences a loan’s EMI burden.
How repo impacts loan EMI?
Home loan interest rates mimic the direction of change in repo. For instance, when the current repo rate is reduced, sooner or later financial institutions also lower the rate at which they offer loans. Conversely, when repo is increased, they set a higher rate of lending in response.
Since interest is an important component of loan EMI, any change in the same influences monthly instalment. For instance, when the current repo rate was decreased in May 2020, it resulted in a reduction of housing credit rates and in turn, lowered the EMI burden for both new and existing customers.
One must note that changes in repo rates reflect on repo rate linked home loans quicker than on loans based on other external benchmarks.
Though repo cuts help lower EMI burden, individuals can use other means to lower their interest payable. For example, they can improve their CIBIL score, lower credit utilisation ratio and repay debts on time to avail better terms of service and a lower rate of interest from lenders.
Read Also: Does Repo Rate Affect the Home Loan EMIs?
