Pranjal Kamra, CEO, Finology Ventures, lists seven efficient ways to cope with the rise in EMIs even as you balance your monthly budgets.
With the Reserve Bank of India increasing the repo rate (this is the rate at which the RBI lends money to banks; any increase in this rate increases the cost of providing funds for lenders and vice versa) by 40 basis points (1 per cent = 100 basis points), private as well as public sector lenders have increased their lending rates.
The rise in the repo rate wasn't a move out of the blue. Considering India's inflation rate is north of 6 per cent, this was expected to happen which is why banks had already increased their lending rates in recent months.
Now, with the interest rates on loans rising again, the burden on the borrowers increases as it impacts their equated monthly instalments (EMIs).
In this scenario, how should loan borrowers adjust their monthly budgets to cope with this additional cost?
The catch is that this doesn't seem like a one-time event.
If inflation remains out of control, these kinds of hikes will continue and, as a result, increase your loan EMIs. That's why tweaking your savings and investment plan is necessary to combat both inflation as well as your debt burden in the coming months.
Here are some ways to help you manage your finances:
1. Efficient spending management
As a result of the interest hike, your EMIs will increase as well.
To cope with this additional burden on your pocket, you will need to cut down on expenses like impulse spending, regularly eating out or ordering expensive meals, casual shopping, etc.
One smart way to keep an eye on your expenses is to have a separate account for your EMI payments.
2. Partial prepayment
In general practice, banks extend your loan tenure rather than increasing the EMI.
However, unless you are struggling with your monthly budget, this is not recommended as it increases your total interest outgo.
If you can tweak your budget strategically, you should go for the increased EMI option instead.
On the other hand, if you opt for an extended loan tenure, you can prepay your loan partially to save a great deal of money. Even prepaying one EMI per year can result in substantial savings.
If you have received a tax refund or bonus or have any surplus cash, don't splurge it on unnecessary expenses. Utilise it to prepay your loan instead.
3. Restructuring or transfer
If you are struggling with your EMI, you can opt to restructure your loan.
Contact your bank to adjust the interest rates, EMI amount or loan repayment tenure based on your repayment capacity.
Otherwise, you can shop around and transfer your loan to another bank that is ready to offer a lower interest rate under the 'balance transfer scheme'.
4. Strategic investment plan
A very useful investment hack if you anticipate a possible interest rate hike is to assume that the hike is already in place and start investing for the balance amount from today itself.
Say, the interest rate on your home loan is 6.5% at present. You expect this to rise to 6.9%. Start a SIP in a short-term debt fund for the additional 0.4% of your loan.
If rates go up, this corpus will help you meet the additional cost.
If the rates remain intact, you can celebrate because your capital is now being saved instead of being spent.
5. Home loan saver option
Many lenders offer this useful facility on home loans.
Under this option, you can deposit your excess savings in a savings account linked to your home loan.
The bank deducts the balance of your savings account from the outstanding loan amount and then calculates the interest.
The more funds parked in this account, the more will be the savings in interest.
Plus, this option is flexible as it is similar to a savings bank account. Besides, it not only saves you interest outgo but also creates discipline.
6. Multiple debt management
When you have multiple loans in your books, you need to prioritise your debts and strategically allocate your funds.
A mathematically proven method to help you clear off your debts faster is to repay the loan with the highest interest rate first.
Say, you have a credit card loan, a car loan and a home loan.
You should repay your credit card loan first since it carries the highest rate of interest.
The reason you should do this is that, in the long term, the loan with a higher interest rate will result in more interest outgo than the one with a lower interest rate. Defaulting on the higher-interest rate loan will also attract more penalties.
7. Building an emergency corpus
Building an emergency fund becomes a necessity in fighting times.
In case you are anticipating a rate hike in the coming months, the emergency fund becomes all the more significant
Ideally, you should have an emergency fund at least 3-4 times your EMI amount, so you are left with a surplus even after servicing an EMI in case of emergency.
Efficient management of debt is a prerequisite to ensure that your financial condition remains intact.
However, this is a continuous process. You never know what emergency may suddenly occur to throw your finances off balance.
Macro-economic factors are certainly not in your control. That is why being prepared at any moment is important.
Efficient spending management, an adequate emergency fund, health insurance, strategic debt planning and a disciplined investment habit can help you sail unscathed through financial storms.