The Reserve Bank of India (RBI) has introduced comprehensive guidelines for adjusting floating-interest rates on Equated Monthly Instalments (EMIs) in personal loans. A floating interest rate varies over time, influenced by economic and financial conditions. This rate is determined by adding a spread to a reference rate, often a benchmark like the prime rate. The rate can change quarterly, half-yearly, or annually and is impacted by factors including government policies, inflation, and global economic conditions. Borrowers opt for floating rates when they expect reductions, aiding quicker debt repayment. However, rate fluctuations can challenge both borrowers’ loan management and investors’ earnings, making planning complex.
Prelims pointer
- Equated Monthly Instalments (EMIs): Regular payments made by borrowers to repay loans, including both principal and interest portions, over a specified period.
- Floating Interest Rate: A variable interest rate that changes periodically based on a reference or benchmark rate, affected by economic conditions.
- Reference Rate: A benchmark interest rate, such as the prime rate, used as a base for calculating floating interest rates.
- Spread or Margin: An additional percentage added to the reference rate to determine the actual floating interest rate.
- Repo Rate: The rate at which the central bank lends money to commercial banks, influencing interest rates in the broader economy.
- Inflation Rate: The rate at which the general level of prices for goods and services rises, affecting purchasing power and interest rates.
- Fiscal Deficit: The difference between government revenue and expenditure, impacting economic stability and policy decisions.
- Prime Rate: The lowest interest rate offered by commercial banks to creditworthy customers, serving as a benchmark for other interest rates.
- Loan EMI Burden: The impact of interest rate fluctuations on borrowers’ monthly repayment obligations, affecting financial planning.
- Return on Investment: The gain or loss from an investment relative to its cost, influenced by interest rate changes.