Increase in bank rates Deduct tenure or EMI

With the change in the Reserve Bank of India (RBI) repo rate, the interest rates of other banks also change. Right after the announcement of the repo rate increase by RBI last week, many government, public and private banks raised their interest rates. In such a situation, it becomes difficult for a client to choose between reducing the term of the loan or EMIs.

A term is the period of time one is given to repay a loan. Almost all types of loans have a loan term, such as personal loans, business loans, auto loans, education loans, and home loans.

An EMI is likened to monthly installments consisting of both principal and interest that a person pays to repay a loan. Reimbursement by EMI starts from the month following the month in which full disbursement is taken.

A mandate and EMI are co-linked. The longer the term of the loan, the lower the monthly EMI outflows will be. Shorter terms mean a greater EMI burden, but the loan is paid off faster. If a consumer has a short-term cash flow mismatch, the bank can increase the term of the loan and the EMI burden decreases. But longer terms mean paying higher interest on the loan and making it more expensive.

Ambuj Chandna, President – Consumer Assets, Kotak Mahindra Bank, said, “A client may have other obligations to fulfill from their income after the EMI service. A sudden increase in installments could impact the household budgets and lead to EMI bounces. Thus, it is best to adjust the rate increase via the term of the loan. Naturally, this is subject to other parameters such as sufficient space in the age of service and applicable policies.

Why do banks increase tenures instead of EMIs?

The bank proposes a schedule of EMIs at the time of the payment of the credit. If one repays according to the schedule, the loan will be cleared towards the end of the schedule.

However, the decision is up to the consumer. You can repay a supplement, this is called an additional payment. This can also be done through net banking.

By fetching additional remittances, one can save a lot of interest. For example, if someone chooses 240 months, chances are they can repay the loan in 200/220 or in a much shorter period by paying extra. By paying EMIs on schedule, a customer ends up paying higher interest.

Apart from this, the EMI loan is calculated/fixed according to the income of the individual. Each time the loan interest rate increases, the bank increases either the current EMI or the repayment period. Since banks don’t have the most up-to-date information on an individual’s income, it’s easier to increase the term of the loan based on their old income statement.

Occupancy deduction or EMI?

Definitely, people get confused with the calculations on whether to reduce occupancy time or EMI. One has the possibility of lowering the duration of the loan in their bank. The client and the bank consider the seniority deduction a better option than the EMI deduction.

If a person can afford to pay the higher EMI, then it is better to reduce seniority. This will lead to a lot of interest savings.

Now, if someone is unable to pay the EMI, he should definitely ask the bank to reduce the EMI. This will increase tenure, but be less burdensome on pay. “The customer should contact the bank and express their interest and ability to make an enhanced payment,” Chandna said.

“The loan agreement covers variable rates and the likely impact of rate changes on the term of the loan. The consumer is aware that rates may vary based on the change in the repo rate by the RBI. Any change in the remaining term of the loan or the corresponding down payment, if any, is communicated to the customer post factor. The customer can approach the bank in the event that he wishes that the impact of the rate increase be given on the EMI and not on the tenure. The request is then considered in accordance with the bank’s defined policy and process,” he said.