On 7th February, Friday, RBI Governor Sanjay Malhotra has announced a cut of 0.25 percent (25 basis points) in the repo rate in the MPC meeting of February.
RBI Finance Minister has cut the policy interest rates after five years. This will make it cheaper to take home and car loans. If a customer has taken a loan on a floating rate, then EMI or loan tenure will also be reduced. This repo rate cut will greatly benefit those taking new loans.
What is Repo Rate?
Repo rate is the interest rate at which banks get loans from RBI. This means that the reduction in repo rate will make it easier for banks to take loans. With this, they can also give loans to their customers at a lower interest rate. New customers taking loans will be benefitted from this as their EMI or loan period would get reduced. At the same time, if someone has taken a loan on a fixed or floating interest rate, then EMI will also be reduced.
Repo rate cut impact on EMI:
After the repo rate cut, customers who take home loans on floating interest rates have two options. They can either reduce their EMI or reduce the loan tenure. If the customer reduces the EMI, it will reduce the burden on the monthly budget. With this, customers will have some extra money saved every month.
Whereas reducing the tenure will ensure that the loan is repaid quickly. This will ensure that the loan is repaid quickly and there will be savings on interest as well. This is a good option for those customers want to repay their loan quickly.
Benefits of interest rate reduction:
It depends on how much loan the customer has taken and for how long. If the customer has taken a loan of Rs 30 lakh for 20 years at an interest rate of 8.75 percent. The EMI on this will be Rs 26,511 and the customer will have to pay a total of Rs 33,62,717.
But, if bank reduces the interest rate by 0.25% after the RBI rate cut, then customer’s interest rate will become 8.5%. Following this, customer will have to pay only Rs 26,035 as EMI.
This means the customer will directly benefit by Rs 476 every month. The total deposit required will be Rs 32,48,327, resulting in a direct benefit of Rs 1,14,390.