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Loan Just Got Cheaper With Rate Cut

    IndianMoney.com Research Team | Wednesday, April 06,2016, 06:20 PM
 

Struggling with loan repayments? Too many loans to repay? There is great news for you. The Governor of RBI has reduced the repo rate by 25 basis points, from 6.75% to 6.5%. (1 basis point is 0.01%). So what is this repo rate? The rate at which banks borrow money from the RBI, is called the repo rate.

What is special if the RBI cuts repo rate?

If the repo rate is cut by the RBI, banks can borrow money from the RBI, at a lower interest rate. Banks can collect money paying a lower rate of interest. (Banks get money at a lower cost). Banks then lend this money to you and other borrowers, who avail loans. If banks can collect money at a lower rate, they would be happy to lend to you at a lower rate. Repo rate cut is done with the hope, that banks will pass on the benefit of lower costs to you (the borrower). Banks would cut the lending rates on your loan and you would be able to pay back your loan faster.

How do you benefit from a repo rate cut?

Banks would cut the interest rates on your loan…Hopefully immediately. Simple…Banks could keep your EMI same and reduce the tenure of your loan. This helps you to pay back your loan, a few months or even a few years earlier.  

Banks might reduce your EMI’s and increase the tenure of your loan. You get the benefit of paying back your loan with a lower EMI. You will not struggle to make your EMI payments in time, if you are paying lower EMI’s.

Either way…You’re a winner.

Why banks can reduce your loan rates?

Banks used to lend at a base rate. The lowest rate banks can lend is called the base rate. (Banks do not lend below the base rate). The base rate of most banks is between 9.3% to 9.7%.

Many banks have stopped following the base rate, to calculate interest rate on loans. Now banks have shifted to MCLR (marginal cost of funds based lending rate), to calculate interest rate on loans. Banks would fix the lending rates, based on the interest rate they pay their depositors.Most banks have also cut interest rates they pay you on fixed deposits. (Interest rates on FDs have been slashed). Most banks pay you interest on fixed deposits at 7.25% to 7.5% a year. This was much higher in earlier years.

Banks win the fight…..

The Government has also reduced interest rates on small saving schemes like PPF, NSC, Postal Saving Schemes, SCSS and Sukanya Samriddhi Yojana, from April 1st 2016 to June 30th 2016. A cut in interest rates of small saving schemes by the Government, gives banks the chance to cut interest they pay you (depositor) on fixed deposits you invest with the bank. If banks cut fixed deposit rates they pay you (depositors), they can also cut loan rates if you avail a loan from them. In past times if banks cut deposit rates on FD’s, you  could flee to post office deposits. Now you have no place to run.

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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