Central bank in India has increased interest rates by 2.5% in 1 year period from May 2022 to May 2023.
Impact of this obviously is reflected in loan interest rates .
Just an example -20 year loan of Rs 50 lakh whose interest rates have gone up from 6.8% to 9.25% will take 45 years to be repaid instead of original Tenure of 20 years.( if the buyer is not able to increase the EMI component)
This means that there is tremendous interest outgo due to the availed loan.
There are various ways to tackle this challenge
- Employees do get bonus or yearly incentive. One can use this lumpsum amount to prepay the loan. This will ensure that outstanding loan balance decreases at a faster rate and will lead to shorter loan tenure.
It is always a good strategy to prepay the loan especially at the early part of loan tenure.
2. Another way is to increase the EMI which will bring down the interest outgo though this also means burden on household budget as amount available for household budget may decrease accordingly.
Just an example a Rs 50 lakh loan at 9 % for 20 years is availed which means EMI/Month is Rs 44986 and interest payable over lifetime of loan is Rs 58 lacs.
If one reduces the loan tenure to 15 years, then EMI goes up to Rs 50713 though interest comes down to 41.28 lacs which is savings of over 16.68 lacs over 15 years.
Again Prudent budgeting helps the household to tide over those challenges
