People who take loans from the bank are usually at a fixed interest rate or in a floating interest rate. When it is fixed, the interest might be in a higher range, but it won't change if the repo rates set by the RBI are changing. If it is a floating interest rate, it will change whenever the RBI makes changes to the repo rate. The biggest question that everyone might have is about what is repo rate is and why it is affecting our loan interest rates.
Repo Rates
Let's first understand what the Repo rate is all about. Bank lends its money from the RBI at a particular rate of interest and that rate of interest is the repo rate. Bank lend money from the RBI and give us individual loans at a slightly higher interest rates, as we cannot lend money directly from the RBI. This repo rate is something that can change several times in a year based on inflation and how the currency is doing in general.
When the RBI changes the repo rate, the banks will also change the interest rate with individuals. This is how the change happens. It does not mean that the rates will go down; there are instances where the repo rates can go high, and repo rates can go down.
My loan interest rate got reduced
I have a home loan and have been paying my interest for the past two years. I also do some extra payments at times to see if I can reduce the overall value by reducing the tenure. The rate of interest keeps changing based on the RBI repo rate. In the last one year, the repo rates have reduced by 1% which is a huge number, and correspondingly, that has reduced my interest rate as well. Now the interest rate looks similar to that of the bank FD rates.
This makes me feel that it may not be a great idea to close off the loan soon, but instead, do some investments if I have any additional money. Nobody would give me a loan for a value similar to the FD value. I'm glad that the bank is giving it in the form of Home loan, and it may be wise to use the additional money to do some investments elsewhere and just keep paying the monthly installments alone.
Some people have a different perspective and they advise saying that it is always a good idea to close of the loan sooner than keeping an active loan. I also agree with that perspective, but this repo rate reduction up to 1% is tempting me to do investments outside and keep holding the Home loan because nobody would give me money for this low percentage if I need it for something else.
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