Home, personal loan EMIs set to rise as RBI hikes repo rate for 6th in a row - Here's the math behind it

RBI Rate Hike News: The Reserve Bank of India (RBI) on Wednesday hiked the benchmark lending rate -- repo rate by 25 basis points to 6.50 per cent to bolster the fight against inflation. The repo rate is the rate at which the central bank lends money to commercial banks. The decision paves the way for public and private sector banks, housing finance companies and other lending institutions to hike the interest rate on all kinds of loans. 

When banks and lending institutions will hike interest rates correspondingly, eventually existing and new borrowers will have to dole out higher EMIs for their loans.

Today’s hike is the 6th such hike since May 2022 when the central bank had hiked the repo rate by 40 bps in an off-cycle meeting of the six-member rate setting panel that marked a change in RBI’s track by shifting focus on prioritising inflation over growth.

RBI Governor Shaktikanta Das in his address today said that the MPC decided 4:2 vote to remain focused on withdrawal of the accommodative policy. He added that policy rate at 6.5o per cent still trails the pre-pandemic level.

With the latest increase, the benchmark lending rate has now hit a two-year high. Banks and lending institutions have already hiked interest rates on all kinds of loans after the RBI on May 4, 2022 increased the repo rate, the first such hike since August 2018. After today's decision, the stage is set for lenders to follow suit as the cost of funds is bound to rise.

Let’s understand how the rate hike will impact your EMIs:

HOME LOAN

If you have borrowed a home loan of Rs 25 lakh at 8.25 per cent per annum for a tenure of 20 years and the interest is hiked to 8.50 per cent, your EMI will go up approximately by Rs 394 from Rs 21,302 to Rs 21,696. For Rs 50 lakh, the EMI will increase by Rs 788 from Rs 42,603 to Rs 43,391.

CAR & BIKE LOAN

Likewise, if the interest rate is increased from 9% to 10% on an auto loan of Rs 7.50 lakh with a tenure of 7 years, the EMI will become costlier by Rs 400. 

PERSONAL LOAN 

Similarly, for a person who borrowed a personal loan of Rs 5 lakh at 13% per annum for a tenure of 5 years, the EMI, in case the interest rate is increased to 15%, would go up by Rs 518 from Rs 11,377 to Rs 11,895.

In the last one year, interest rates on loans have gone up by around 2 per cent --  undoing the EMI calculations for borrowers. Home and auto loan borrowers can keep their EMI unchanged even after the hike in interest rate. However, they will land up paying EMIs for a longer tenure. Here, it is to be noted that when you extend your loan tenure, your interest payable amount increases across the years. Other factors like borrower’s age and ability to repay loans play a crucial role in tenure extension.

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