[Explained] Here is how to financially prepare for higher EMIs post rate hike

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Loans have become dearer. Two consecutive rate hikes by the Reserve Bank of India (RBI) have resulted in banks increasing their lending rates. For floating-rate loan borrowers, a rise in key rates means shelling out more equated monthly instalments (EMIs) for your home loan, car loan and other borrowed sum – existing or new.

Moreover, with the given macroeconomic situation where the inflation rate is likely to remain beyond the comfortable threshold, the current financial year may see a further rise of 75 bps to 100 bps in interest rates. This would escalate the EMIs, putting an additional burden on your finances.

For instance, you have a home loan of Rs 50 lakh for 20 years at a 6.5% interest rate. Your monthly EMI is around Rs 37,279. Suppose after the recent hike, if your lending rate has increased to 7%, your EMI outgo would be Rs 38,765. This would mean a monthly increase of Rs 1,486 in your EMIs. Your increase in the total interest payment would be around Rs 3.56 lakh by the end of the tenure, increasing your financial burden.

Therefore, borrowers should start streamlining their expenses and prepare to pay higher EMIs. If you are wondering how to deal with increased EMIs, here are five effective tips to help you through.

Relook At Your Budget

Budgeting is an important exercise to streamline your finances, and a regular review is a necessity. Given that the outgo of money would increase, it calls for re-adjusting your monthly budget. Take a closer look at your monthly inflow and outflow of cash to figure out ways to increase savings and address the rising EMI outflows. Budgeting and re-budgeting improve your financial understanding. You can plan your finances and avoid extravagant spending. In a nutshell, budgeting ensures control of your expenses enabling your confidence.

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Postpone Any Further Big Purchases

If you are already servicing multiple loans, it would be wise to clear existing dues before adding fresh ones. This keeps financial stress at bay. If you have plans for big purchases in the short to medium term, you may postpone them. If they are not a priority, you may delay them for a year or two. A conservative approach helps you control cash.

Cut Down Expenses

Re-budgeting helps you have a holistic view of your expenses. With a logical and calculative approach, you may discover several expenses which you can easily avoid. Or, possibly even after reducing those particular expenses, you may find it is not affecting your normal life. There could be a possibility that you would have to change your lifestyle to save slightly. If the situation demands this, there is no reason why you should not do it. For instance, you may reduce your dining out from once a week to once a fortnight or a month. Such steps may considerably help in saving more bucks in your wallet. You can use this saving to prepay your loan, which will bring down your interest outgo and additional EMIs.

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Increase Your Income And Try To Prepay

A higher inflow balances out the outflows effectively. If your income can be increased, it will reduce the burden of higher EMIs. You may consider looking for a job change to enhance your salary. You may also consider hunting for freelancing jobs alongside your current job. Any extra income is always helpful. Further, save the yearly incentives or bonus (if any) you get from your employer to take care of the increased instalments or use them to make prepayments of your loan.

Settle Your Short-term Loans Faster

Short-term loans like credit card loans, outstanding bills on credit cards, and EMI purchases help buy electrical goods like mobile phones, laptops, air-conditioners or home furniture, and two-wheeler loans, among others. Such borrowings often come with high interest rates. Make sure they’re paid on priority, else the interest will compound. Therefore, it makes sense to prioritise clearing these short-term borrowings before your long-term loans.

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The phase of low-cost borrowings appears to be over as of now. The key to smooth sailing through the situation is managing your expenses effectively to save more. So borrow as per your need and affordability. Besides this, you may also consider extending the loan tenure to keep your EMIs same.

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.timesnownews.com.)

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