Loans are going to be expensive post repo rate hike by the Reserve Bank of India (RBI). For anyone with floating rate loans, this means more EMIs and having to spend more months or years in debt. When interest rates change, normally the loan tenor is changed to adjust for the new interest dues.
But in a handful of cases, people opt for EMI adjustments. This means that every time interest rates change, their EMI changes, too. The current rate hikes will impact especially those with large-ticket loans such as home loans.
Suppose you have a home loan of Rs 1 crore with a repayment period of 20 years. An increase in home loan interest rate from 6.75% to 7% per annum may look meagre at 25 basis points. But it will result in an increase in the total interest amount by a whopping Rs 3.58 lakh till the end of the tenure.
If you’ve opted for an EMI adjustment, your EMI will increase from Rs 76,036 to Rs 77,530. It will continue to go up as rates increase. Are you prepared to pay higher EMIs? Here are some tips to help you manage higher EMIs.
Cut Down Your Non-Essential Expenses
With inflation beyond the expected levels, borrowers need to manage inflation and high interest rates simultaneously. It is advisable to cut down your non-essential expenses to cope with inflation and increase your savings to pay higher EMIs. If you can cut down unnecessary expenses and use it to prepay your loan, you can get big relief from the hike in your EMIs.
Think Before Applying For New Loans
If you have multiple loans and the interest rates are increasing, carefully check your financial health and assess whether you will be able to pay the EMIs for a new loan. When the interest rate increases, you should focus on repaying your existing loans.
Adhil Shetty, CEO, Bankbazaar, explains, “You must first focus on repaying your loans on time. Adding a new loan when the interest rate is going up can put extra stress on your financial health. So, try closing your existing loans first before you apply for a new one.”
Review Your Financial Plan
When you pay higher amount EMIs, your financial goals might require a review. The ideal reaction to this situation is to prioritise your goals. “You can make necessary adjustments in the fund allocation towards your goals so that you can achieve your critical goals on time whereas you may delay such goals which are placed lower in your priority list. If your income increases in the future or the interest rate comes down, you may reinstate your original financial plan,” suggests Shetty.
Use Windfall Gain To Prepay Loans
It is advisable to reduce your loan baggage whenever you see windfall gain in income. Sometimes people use windfall gains like an annual bonus or a surplus business income for unplanned expenses like vacations or buying electric goods, etc. Instead, if you use such funds on prepaying your loans, you can save more money towards your interest outgo.
Exit Low Return Investments to Prepay Loans
Take a relook at your existing investments. If there are low-yielding investments providing lower returns than your home loan rate, you may exit them to prepay your loan. It will relieve you from the stress of higher EMIs. You can always accumulate the corpus again when you don’t need to pay higher interest rates on your loans.
In the end, if you are finding it difficult to pay higher EMIs, you can always choose to extend the loan tenure or partially pay some amount to keep your EMIs unchanged. You can get in touch with your lender to help you find the best option depending on your situation.
from | The Financial Express https://ift.tt/wlDjk8z
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