The RBI rate cut could save you Lakhs on your loan... If you use it right. The answer

The RBI recently cut the repo rate by 25 basis points to 5.25%, taking the total rate reduction for the year to 1.25%.

When the RBI cuts interest rates, borrowers usually expect one thing. A lower EMI. Banks are happy to offer that. A smaller monthly payment feels like relief. But very few borrowers pause to ask a more important question. Is this actually the best way to use a rate cut?

In most cases, it is not. A rate cut is not just about making the loan feel easier. It is an opportunity to reduce how long you stay in debt and how much interest you pay to the bank overall.

The Standard Approach

Assume a common example:

• Loan amount: ₹50,00,000

• Old interest rate: 8.5%

• New interest rate: 7.25%

• Old EMI: ₹43,391

• Tenure: 20 years

  
  

When the repo rate drops, most borrowers tell the bank (or simply accept automatically):

“Reduce my EMI.”

So the EMI falls to around ₹39,500. Total interest you still end up paying: ₹44.8 lakh. Your wallet feels lighter each month, but the bank continues earning from you for 240 months.

An Alternate Approach

The question to ask is simple: If you’re already used to paying ₹43,391… why stop?

When you keep the EMI same and let the bank adjust the tenure, the numbers shift dramatically.

Your ₹43,391 EMI stays as-is. But your tenure drops from 20 years to ~16.5 years.

And your total interest collapses to:₹39.1 lakh . That is a saving of over ₹15 lakh compared to the original loan. All without paying a single rupee extra each month.

This is the part banks don’t highlight, because shorter loans mean lower interest earnings for them.

Option	EMI	Tenure	Total Interest	Money Saved
Reduce EMI	Lower	Same (20 yrs)	₹44.8 lakh	₹9.3 lakh
Reduce Tenure	Same	Cut to 16.5 yrs	₹39.1 lakh	₹15+ lakh

Why Reducing Tenure Works Better

Home loan interest is front loaded. In the early years, a large portion of every EMI goes toward interest rather than principal. When you reduce EMI, the loan runs for the same length of time, allowing interest to keep accumulating. When you reduce tenure, you cut off the costliest part of the loan. The later years where you would have paid mostly interest simply disappear. This is why tenure reduction almost always beats EMI reduction when your income can support it.

Who Should Choose What?

Choose lower EMI if:

• Cashflow is genuinely tight

• You’re facing job uncertainty

• You need liquidity for medical/family reasons

• If you have the risk appetite to invest the remaining in the capital markets.

  
  

Choose lower tenure if:

• EMI is comfortably manageable

• You want to reduce long-term liability

• You prefer being debt-free earlier

• You don’t want to feed the bank extra lakhs for no reason

• You don't want to invest excess in the capital markets.

An RBI rate cut gives you a choice. You can make your EMI lighter, or you can make your loan shorter. Both are valid, depending on your situation. What matters is understanding the trade off and choosing consciously. Used wisely, a rate cut can be more than monthly relief. It can be a meaningful step toward long term financial freedom.

Disclaimer: This content is for educational purposes only; please conduct your own research and consult with a qualified investment advisor before making any investment decisions.

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