Srikanth has taken a home loan of Rs 70 lakhs at a rate of 11 percent for a tenure of 15 years. His equated monthly installment (EMI) is Rs 79,500. EMI is an amount that must be paid to the lender towards repayment of the borrowed sum. Due on a specific date each month, these installments pay off both the interest and principal components of a loan.
The EMI amount fluctuates with the market rates. Floating interest rates in particular are prone to larger fluctuations . If the rate heads upwards , the borrower is burdened with a higher monthly EMI. Instead, if the rate travels downwards, the quantum of monthly repayment to the lender drops. Borrowers on a floating rate usually seek to benefit in the event of a fall in the interest rates.
Many borrowers are not prepared for increased EMIs due to a constant hike in interest rate. If you plan your finances well and incorporate strategies to deal with increased EMIs, being debt-free sooner will become a pleasant journey . Consider the situation if Srikanth's interest rate on his home loan is increased by two percent after three years. His EMI translates to Rs 88,500. Srikanth must work on a strategy that helps him repay comfortably despite rate hikes.
PREPAY IF YOU HAVE SURPLUS
Time and again during the tenure of a loan, whenever the borrower has excess funds he must prepay. Prepaying reduces the cost of borrowing funds and also makes the homeowner debt-free sooner. In this world of uncertainties, getting rid of high interest debt must be an individual's top priority.
INCREASE EMI AMOUNT
Those who can afford to pay a higher EMI can consider stretching it to their maximum capacity. Long tenure loans, translate into lesser EMI burden . However, paying higher EMIs enables a person to be debt-free ahead of the loan tenure. This allows you to focus on other financial goals without worrying about home repayments .
CONSIDER SWITCHING
If your lender is charging a high interest rate compared to another lender, you can contemplate the switching option. However, take into account the processing fee and the switching charges that the new lender could charge. Also, find out if a rate hike is due with the new lender. It would be disheartening to have a rate hike immediately after switching to a new lender.
DO NOT STOP SAVING
Set aside a small amount every month to meet emergency expenses.This contingency fund will come to your rescue in the event of job loss or accident.