Ways to re­duce your EMI

Here are a few op­tions if high monthly out­goes are a cause for con­cern

The Hindu Business Line - - YOUR MONEY - NALINAKANTHI V Op­tions

Are the equated monthly in­stal­ments (EMIs) on your on­go­ing loans hurt­ing your lifestyle? While many loan tak­ers look to the RBI and banks for some re­lief, rate cuts — how­ever big — do not au­to­mat­i­cally re­duce your monthly EMI outgo. This is be­cause banks keep the EMI un­changed when there is a change in the in­ter­est rate and in­stead mod­ify the ten­ure of the loan.

For in­stance, when­ever there is an in­crease in the in­ter­est rate, the ten­ure of the loan will au­to­mat­i­cally go up. Sim­i­larly, a fall in the in­ter­est rate will re­sult in a re­duc­tion in the loan ten­ure. Banks do this to keep things sim­ple. If you want the EMI to be ad­justed with changes in in­ter­est rates, you will need to in­form the bank ac­cord­ingly.

Be­sides this, how can one re­duce the monthly EMI outgo?


Re­fi­nanc­ing is one way to re­struc­ture your loan port­fo­lio and re­duce your monthly outgo. As the first step, make a list of all the loans you’ve taken, in­clud­ing the quan­tum, the lender, the loan type and the cost of these loans. This will help you iden­tify high-cost loans — in terms of lenders and loan prod­ucts. Once this is done, you can ex­plore re­fi­nanc­ing op­tions so that you can sub­sti­tute the high-cost loans with cheaper, bet­ter al­ter­na­tives.

For in­stance, if you had taken an un­se­cured loan from an NBFC since you were in dire need of money and they sanc­tioned it in short or­der, you can now con­sider re­fi­nanc­ing that loan with a se­cured loan such as home loan top-up from a pub­lic or pri­vate bank that of­fers you the best deal. This will help re­duce not only your EMI outgo on a month-on-month ba­sis, but also your over­all in­ter­est outgo through­out the loan ten­ure.

Also, con­sider se­cured loan op­tions over un­se­cured ones, to the ex­tent pos­si­ble. The in­ter­est dif­fer­en­tial on these loan cat­e­gories can be quite sig­nif­i­cant. For in­stance, while the in­ter­est on a istock.com/rudall30

per­sonal loan is 12-18 per cent, you may be able to cur­rently get a home loan top-up at 9 per cent or less.

Pre-pay loan

Re­duc­ing the loan prin­ci­pal by pre-pay­ing your loan is an­other op­tion you can con­sider. This will not only help you re­duce your EMI out­flow but also bring down the over­all in­ter­est on the loan. When­ever you get sur­plus cash, ei­ther by way of a gift or a bonus, you can con­sider re­pay­ing high-cost loans. How­ever, there are two points that one needs to keep in mind be­fore de­cid­ing to pre-pay loans. While it is true that a re­duc­tion in the loan obli­ga­tion can give us a sense of re­lief and hap­pi­ness, you should do it only if the cost of your loan is higher than the re­turn on your in­vest­ment. This is par­tic­u­larly true for ag­gres­sive in­vestors who can gen­er­ate in­vest­ment re­turns higher than the loan cost.

For in­stance, if your post-tax in­vest­ment re­turn is 15 per cent and the an­nu­alised in­ter­est cost is 9 per cent, you may be bet­ter off con­tin­u­ing the loan and us­ing the sur­plus re­turn to meet your monthly obli­ga­tions. In con­trast, if you are a con­ser­va­tive in­vestor earn­ing a post-tax re­turn of, say, 6 per cent, it is best that you use the sur­plus money to pay off your loan.

One other as­pect to be kept in mind while eval­u­at­ing pre-pay­ment is as­so­ci­ated costs such as pre-pay­ment penalty, the limit on the num­ber of pre-pay­ments that can be made in a year and the avail­abil­ity of part-pay­ment fa­cil­ity. This is be­cause some banks al­low only full pre-pay­ment and discourage part-pay­ment of loans.

In­crease ten­ure

Fi­nally, if none of the above-men­tioned ideas suit you, you can also con­sider in­creas­ing the ten­ure of the loan. For in­stance, if you had opted for a two-year loan, you can con­sider in­creas­ing it by an­other year. That will leave you with ad­di­tional cash on hand to take care of other fam­ily ex­penses. The flip side of this is that you will end up pay­ing a higher in­ter­est over­all. Given that this will in­crease your over­all in­ter­est outgo, this can be the last re­sort.

The writer is an in­de­pen­dent fi­nan­cial con­sul­tant Look for cheaper re­fi­nanc­ing op­tions

In­creas­ing loan ten­ure should be your last re­sort

Re­fi­nanc­ing will help re­duce not only your monthly EMI but also your over­all in­ter­est outgo

Pre­pay loans only if you are a con­ser­va­tive in­vestor

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