Last Updated on March 14, 2023 by Tabraiz
When the Reserve Bank of India increases interest rates, financial institutions likely follow suit and raise their rates to maintain profitability. It often results in an increase in EMIs for customers with outstanding Personal Loans.
Personal Loan interest rates are usually variable, meaning they can change throughout the loan tenure. It is important for borrowers to know how rising interest rates can impact their EMIs so they can plan their finances accordingly. There are some points you need to know before checking your Personal Loan eligibility.
What Do You Need to Understand?
- First, you need to know that Personal Loan interest rates are generally determined by the RBI’s repo rate, which is the rate at which financial institutions borrow money from the central bank. Personal Loan interest rates increase in tandem with the repo rate. It is because when financial institutions have to pay more to borrow money, they often pass on this cost to the customers in the form of higher interest rates.
- Similarly, Personal Loan interest rates decrease when the RBI decreases the repo rate. It is because lending institutions can borrow money at a lower rate and thus don’t need to charge as much interest on Personal Loans. However, it’s always important to note that the financial institutions are not required to pass on the full benefit of a decrease in the repo rate to customers. They may only lower interest rates by a certain amount, so it’s still possible for EMI amounts to not go down much even when the repo rate falls. Of course, Personal Loan interest rates also depend on factors besides the RBI repo rate.
- Financial institutions consider their borrowing costs and their desired profits when setting Personal Loan rates. It implies that even if the repo rate stays the same, Personal Loan interest rates can still fluctuate depending on how financial institutions want to manage their profitability.
So, What Does This Mean for Personal Loan Borrowers?
It’s important to remember that your EMI could go up at any time if interest rates rise. That is why it’s a good idea to always have some buffer amount in your budget so you can handle monthly repayments if the EMIs increase.
Getting a fixed Personal Loan interest rate is also a good idea. With a fixed-rate loan, your interest rate will stay the same for the entire tenure of the loan, no matter what happens with interest rates in the broader economy. It can make it easier to budget for your loan repayments.
Different Ways a Rise in the Interest Rate Can Impact Your EMIs
A rise in the interest rate can undoubtedly impact your EMIs, and there are different ways this can happen.
- If you possess a variable interest rate on your loan, a rise in the benchmark interest rate will also cause your EMIs to go up.
- If you are looking to refinance your loan at a lower interest rate, a rise in rates may make it difficult or impossible to find a better deal.
Impact of Rising Interest Rate on Loan
A rise in interest rates usually affects your Personal Loan eligibility criteria. It is because when interest rates go up, the cost of borrowing also goes up. Your EMIs will become more expensive, and you may find it difficult to repay your loan.
However, a rise in interest rates may signify an upturn in the economy, your income will most likely not go up at the same time, and higher EMIs are the last thing you need during such times.
A rise in Personal Loan interest rates can impact your EMIs differently, depending on your circumstances. It is important to remember that an increase in interest rates can sometimes impact your monthly budget. So, before planning any expenditure, you should carefully consider the impact of a rise in interest rates on your budget.