RBI repo rate cut: How your home and auto loans could get cheaper

The Reserve Bank of India (RBI) has reduced the repo rate by 25 basis points (bps) from 6.5 per cent to 6.25 per cent. Since most home and auto loans are tied to the repo rate, this move is expected to make these loans cheaper, leading to savings for borrowers.

While many borrowers expect their EMIs to decrease, in most cases, banks prefer to keep the EMI unchanged and instead reduce the loan tenure. A lower tenure means you pay off the loan faster and pay interest on the principal for a shorter period, leading to significant interest savings.

Here's how this works in practice:

Home loans

If you have a Rs 50 lakh home loan at an interest rate of 8.5 per cent (before the rate cut) over 20 years, you are paying an EMI of Rs 43,391.

After the rate cut, the interest rate on the loan will be reduced to 8.25 per cent. But since the EMI remains the same at Rs 43,391, the loan tenure will be shortened by 10 months, leading to Rs 3.5 lakh in interest savings over the life of the loan.

Auto loans

Similarly, for a Rs 10 lakh auto loan with an interest rate of 10 per cent (before the rate cut), the EMI is Rs 21,247 for a period of five years.

After the rate cut, the new loan rate becomes 9.75 per cent, and the EMI stays the same at Rs 21,247. As a result, the loan tenure will be shortened by three months, saving you Rs 15,000 in interest over the loan period.

While many borrowers may hope for a lower EMI, a reduction in the loan tenure is actually better. By maintaining the same EMI and shortening the loan tenure, you pay off the loan faster and save more on interest. This helps you clear your debt sooner without affecting your monthly cash flow.

When will you see the benefit?

Those with repo-linked loans could see the benefit within two to three months. However, note that banks don't always pass on the full repo rate cut immediately. In case of tight liquidity, some banks even delay cutting rates.

Also read:
How will debt funds react to potential RBI rate cut?
Should you prepay your home loan?