Interest Rate

Loans & Credit

Interest rate is the cost of borrowing money expressed as a percentage of the principal per year. For loans it is what you pay to the lender. For deposits it is what you earn. Indian bank loan rates are mostly floating, linked to RBI's repo rate via RLLR (Repo-Linked Lending Rate).

In detail

Types of interest rate in India: Repo rate -- rate at which RBI lends to banks (6.5% in 2024). MCLR -- Marginal Cost of Funds based Lending Rate, used for loans taken between 2016-2019. RLLR/EBLR -- External Benchmark Lending Rate, linked directly to repo rate, used for all loans after October 2019.nnFixed vs floating: Fixed rates provide certainty but are typically higher than floating rates. Floating rates change when RBI changes the repo rate. When rates are falling, floating rate borrowers benefit immediately.

Formula

Simple interest: I = P x R x T / 100 Compound interest: A = P x (1 + r/n)^(nt) EMI (reducing balance): EMI = P x r x (1+r)^n / [(1+r)^n - 1]

Real-life example

🇮🇳 India example

RBI cuts repo rate by 0.25% in February 2025. Your Rs 40L floating rate home loan (RLLR-linked) at 8.75% reduces to 8.5% within 90 days. Monthly EMI saving: approximately Rs 500/month. Over remaining 15 years, total interest saving: approximately Rs 90,000.

Frequently asked questions

What is MCLR and how does it affect my loan? ▼

MCLR is the minimum rate at which banks lend. Loans taken 2016-2019 are typically MCLR-linked. MCLR resets annually -- rate changes pass through to your loan on the reset date. RLLR loans (post-2019) have faster pass-through, typically within 3 months.