- Over the past two years, interest rates on loans have risen by 1.9% – causing the
EMImath of most borrowers.
- Most experts predict more interest rate hikes to come in December.
- For car and
mortgageborrowers may consider extending their tenure if the burden is higher.
Be prepared to pay more interest if you want to borrow to buy a house or a car. The era of low interest rates has formally come to an end as the Reserve Bank of India kicks off its rate hike cycle in May.
The repo rate, or the rate at which central banks lend to banks, has risen by 1.9% after four consecutive hikes. That means EMIs will only go up, making it more expensive for borrowers. While existing home loan borrowers may see their maturities increase, the monthly installments (EMIs) of personal loans and
“The Reserve Bank of India has increased the repo rate by 50 basis points. This is the fourth consecutive rise in the repo rate, bringing it to 5.9%. This will certainly affect the new and existing borrowers. However, decision has been made to curb rising inflation. With India’s inflation rate of 7%, the value of the currency could fall without the intervention of the RBI to try and support it and lower it,” said HP Singh, chairman and director of Satin Credit Management Network.
First, let’s look at home loans. If you have ₹50 lakh outstanding in a bank at an interest rate of 8.5% over 20 years, the effective EMI you have is ₹43,391. However, if the 50 basis point increase is passed on to the loan, the EMI will rise to 44,986 – an effective increase of ₹595 per month.
For every lakh of home loan for this tenure, the EMI will increase by ₹32.
The net impact is different for auto loans where the maturities are shorter, but the interest rates differ. For example, if you have a car loan of 10 lakh at an interest rate of about 8.6% for a seven-year term, your EMI was ₹15,887. Again, under the changed interest rate regime, it would go up to 16,140 each month – an effective increase of 253.
For every lakh of a car loan for the said term of office, the EMI will increase by ₹25.
For a personal loan spread over two years, the EMI for a loan of 3 lakh at 11.4% would be ₹14,038. After a rate reset, it would rise to 14,108 – an effective increase of 70.
Over the past two years, interest rates on loans have risen 1.9%, undoing most borrowers’ EMI math. For auto and home loans, borrowers may consider extending their tenure if the burden is higher.
However, it should be noted that by extending the term, the interest payable will increase over the years – and especially for large loans such as home loans, the net amount payable will increase accordingly.
The other factors that come into play in tenure extensions is the age of the borrower – although younger borrowers can afford it, most people have to pay off long-term loans before retirement age of 60.
More walks ahead?
When he announced the rate hikes today, the RBI governor
“Going forward, the RBI will remain vigilant, nimble and nimble in its liquidity management activities and use all the tools at its disposal to mitigate the spillover effects of global financial market volatility on domestic financial markets,” said Das.
It means keep going, there could be more rate hikes on the horizon and many experts predict that too. “We still expect a 35 basis point hike in December, followed by a pause as the RBI assesses the Fed’s actions and the impact of past rate hikes on domestic growth and inflation,” said Suvodeep Rakshit, senior economist at Kotak Institutional Equities. .
Those who banked on the low interest rates offered to take out mortgages during the pandemic may need to adjust their monthly math — but the burden of growing interest is what most people around the world have faced and partial prepayments will help if it can be afforded.
Since there may be more interest rate hikes to come, it would be a good idea to pay off personal loans if possible as they can get more expensive.
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