Borrowing money

[Explained] Here’s how to financially prepare for higher EMIs after the rate hike

Loans have become more expensive. Two consecutive rate hikes by the Reserve Bank of India (RBI) caused banks to raise their lending rates. For variable rate borrowers, an increase in key rates means paying more equivalent monthly payments (EMI) for your home loan, your car loan and any other borrowed money – existing or new.

Moreover, with the given macroeconomic situation where the inflation rate should remain above the comfortable threshold, the current financial year could see a further rise of 75 bps to 100 bps in interest rates. This would increase NDEs which would put an additional burden on your finances.

For example, you have a home loan of Rs 50 lakh for 20 years at an interest rate of 6.5%. Your monthly EMI is around Rs 37,279. Assume that after the recent hike, if your lending rate increased to 7%, your exit EMI would be Rs 38,765. This would mean a monthly increase of Rs 1,486 in your NDE. Your increase in total interest payment would be around Rs 3.56 lakh by the end of the term, which would increase your financial burden.

Therefore, borrowers should start rationalizing their expenses and prepare to pay higher EMIs. If you’re wondering how to handle the increase in NDEs, here are five effective tips to help you.

Revamp your budget

Budgeting is an important exercise in streamlining your finances, and regular review is a must. Since the cash outflow would increase, this necessitates a readjustment of your monthly budget. Take a closer look at your monthly cash inflows and outflows to find ways to increase your savings and deal with increased EMI outflows. Budgeting and rebudgeting improve your financial understanding. You can plan your finances and avoid extravagant expenses. In a nutshell, budgeting provides control over your expenses enabling your confidence.

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Postpone any other large purchases

If you already manage several loans, it would be wise to clear the existing contributions before adding new ones. This avoids financial stress. If you have major purchase projects in the short or medium term, you can postpone them. If they are not a priority, you can delay them for a year or two. A conservative approach helps you control cash flow.

Decrease spending

Rebudgeting helps you get a holistic view of your spending. With a logical and calculating approach, you may discover several expenses that you can easily avoid. Or, maybe even after reducing those particular expenses, you might find that it doesn’t affect your normal life. You may need to change your lifestyle to save a little. If the situation calls for it, there’s no reason why you shouldn’t. For example, you can reduce your dining out from once a week to once a fortnight or month. Such measures can significantly help save more money in your wallet. You can use these savings to prepay your loan, which will reduce your interest expense and additional EMIs.

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Increase your income and try prepaying

A higher input effectively compensates for the outputs. If your income can be increased, it will reduce the burden of higher IMEs. You may consider changing jobs to increase your salary. You can also consider looking for freelance jobs alongside your current job. Any extra income is always helpful. Plus, save any annual incentives or bonuses (if any) you receive from your employer to support the increased payments or use them to make prepayments on your loan.

Set your Short term loan Faster

Short-term loans like credit card loans, unpaid bills on credit cards, and EMI purchases help purchase electrical goods like cell phones, laptops, air conditioners, or home furniture, and appliances. two-wheeled loans, among others. These loans often carry high interest rates. Make sure they are paid first, otherwise interest will accrue. Therefore, it makes sense to prioritize clearing those short-term borrowings before your long-term borrowings.

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The phase of low-cost borrowing now seems to be over. The key to getting through the situation smoothly is to effectively manage your expenses to save more. So borrow according to your needs and your financial capacity. In addition to this, you can also consider extending the term of the loan to keep your EMIs the same.

(Disclaimer: The opinions expressed in this column are those of the author. The facts and opinions expressed here do not reflect the views of