If your home or auto loan is tied to the repo rate, there’s some great news for you! The Reserve Bank of India (RBI) has just lowered the repo rate by 25 basis points, dropping it from 6.5% to 6.25%. This means that the interest rates on your home and auto loans will decrease, which will directly affect your EMI or the duration of your loan.
So, will your EMI go down or will your loan term shorten? If you have a floating rate loan, you’ll notice the impact of this cut on either your EMI or your loan tenure. Most banks tend to shorten the loan tenure rather than lowering the EMI, which can lead to significant savings on the total interest and help you pay off the loan faster.
Let’s break it down with an example. Suppose you took out a home loan of Rs 50 lakh at an interest rate of 8.5% for 20 years. Your current EMI would be Rs 43,391. After the repo rate cut, with the interest rate now at 8.25%, your EMI will stay the same, but your loan tenure will be cut down by 10 months, saving you a total of Rs 3.5 lakh.
For an auto loan of Rs 10 lakh with a 10% interest rate over 5 years, your current EMI is Rs 21,247. If the interest rate drops to 9.75%, the EMI stays the same, but you can pay off the loan 3 months earlier, saving you Rs 15,000.
Experts suggest that keeping the EMI steady while shortening the loan term can lead to significant savings. This approach helps you pay off the loan faster and reduces the total interest paid. However, if your monthly earnings are tight and you need a lower EMI, it’s worth reaching out to your bank to discuss options.
Is refinancing the right move for you?
Experts say if you took out your loan after October 2019 and it’s tied to the repo rate, the new rates will apply automatically. But if your interest rate is above 8.30%, it might be time to think about a balance transfer or refinancing.
Benefits of refinancing:
1. A credit score over 750 can help you snag a better deal.
2. Refinancing can be advantageous if you’ve already paid off more than half of your loan.
3. The costs of refinancing (1-2% of the loan amount) should be recouped in just a few months.
What should loan holders do next?
1. If you have a floating rate loan, now’s a great time to pay it off at a lower cost.
2. Banks are expected to roll out new rates in the next 2-3 months, which will be a big relief for home and auto loan borrowers.