In a surprise move earlier this month, the RBI suddenly raised the repo rate by 40bps, making it climb up to 4.40%. This announcement led to a bloodbath in the stock market, besides affecting people¡¯s finances in more ways than one.
And now, amidst soaring inflation, it's widely expected that the RBI will again hike the interest rates in next month¡¯s scheduled MPC meeting. Implying that your EMIs are expected to pinch more in the coming months.
So, how can you, as a new or existing loan borrower, manage your EMIs and reduce the burden amidst the rising interest rate regime? Read on as we unfold the same.
One of the first ways you can get your loan EMI reduced is by requesting your lender to extend your loan tenure. The longer the tenure, the smaller the EMI amount. However, make sure to resort to this option only if you are facing difficulty in repaying your loan EMI and want to reduce the burden.?
This is because extending your loan tenure will also increase your overall interest cost on the loan. So, to retain the joy of paying a smaller EMI amount and at the same time not let the overall interest cost shoot up, go for prepayments. Whenever you have surplus funds, you can prepay (either partially or fully) the loan, as this would lower your total interest outgo.?
But make sure to weigh in the prepayment fees, if any. Only go ahead with prepayment if the overall interest cost saving significantly outweighs such fees.
If your existing lender doesn't provide you with an extended loan tenure and/or another lender is offering you a lower interest rate on your outstanding loan amount, then balance transfer is your answer.?
To reduce your EMI burden as well as interest cost, opt for a loan balance transfer to another lender at a lower interest rate and choose a longer tenure for the new transferred loan, if available.
But again, remember to prepay whenever possible if you get your tenure extended, and factor in the prepayment charges if any. Also, when going for a balance transfer, remember that a new lender usually treats your balance transfer request as a fresh loan application, which may thus attract some fees like administrative charges, processing fees etc. So make sure to factor in all such charges before you switch to a new lender.
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If you are contemplating the thought of taking a secured loan that requires down payment, like a car loan or home loan, you can lower your EMI burden by contributing a higher downpayment, if possible. A bigger down payment will reduce your LTV ratio requirement, which will translate into a lower loan amount and ultimately smaller EMIs v/s those in case of a bigger loan amount of similar tenure and rate.
But do not commit the mistake of sacrificing your crucial financial goals like retirement or child¡¯s higher education when attempting to make the higher downpayment.
Another feasible way to lower your EMI burden for the new loan to be taken, whether it's a home, car, personal, gold loan, etc. is by selecting a longer repayment tenure.?
You can make sure of online EMI calculator tools to arrive at the optimal EMI amount which you think you can repay comfortably as per the applicable interest rate and loan amount.?
For example, in the case of a home loan, assuming you need a ?50 lakh loan @7%p.a.,?if you choose a 10-year tenure, your EMI comes out to be ?58,054. For a 20-year tenure it comes out to be ?38,765,?and for a 30-year tenure it comes out to be ?33,265.
Now, as mentioned before, when choosing a longer tenure for smaller EMIs, make sure to keep making prepayments whenever possible. Putting your surplus funds into this use would help in lowering the overall interest cost of the loan.
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