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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Debt Management and Loans

Meena has a home loan on a floating rate linked to an external benchmark such as the repo rate. The RBI cuts the repo rate and the lender passes on the cut. Which statement best describes the usual impact on her loan if she keeps the EMI unchanged?

With a lower floating rate and an unchanged EMI, the interest component of each instalment falls and a larger share repays principal, so the loan closes earlier. The principal does not increase, there is no automatic fixed-rate conversion, and holding tenure constant would reduce rather than raise the EMI.

  1. AThe tenure typically reduces or the interest component falls, as more of each EMI goes to principalCorrect
  2. BThe outstanding principal is immediately increased
  3. CThe loan converts automatically into a fixed-rate loan
  4. DThe EMI must rise to keep tenure the same

Explanation

When the rate falls and the EMI is kept the same, the interest portion of each instalment shrinks, so more goes to principal and the loan is repaid sooner. Principal is not increased by a rate cut. Conversion to fixed rate does not happen automatically, and EMI would fall, not rise, if tenure were held constant.

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