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Managing higher EMIs

By Vishesh Sharma | 6/6/2011 6:35 PM Monday

On a weekend, sitting comfortably on the couch while watching the IPL cricket match between Chennai and Mumbai, I got a call from my landlord. Thinking it was a reminder call for the rent payment, I answered it up only to get the shock of my life. The landlord informed me that he would be increasing the rent after the current tenure of my leave and license agreement comes to an end. My request for considering a lower hike met with resistance as the landlord had his own reasoning for doing so. The bank has hiked its lending rates and will be adjusting the rate available to him on his home loan - based on the fact that it was a floating rate loan. The increasing EMIs would be next to impossible for him to manage at a lower rent or continue at the same rent going forward.

The RBI has hiked rates in a bid to control the spiralling inflation levels but this will eventually lead to housing and various other loans becoming more expensive in the near future. This would ultimately result in higher EMIs. So how do you manage these rising EMIs particularly if incomes do not rise or your hike in income is away for a while now? At the time of applying for a loan we generally tend to calculate how we would pay it in the long run, keeping various circumstances in mind. But these are the kind of situations which result in our calculations going haywire. You can do nothing in such cases except for bearing the burden of the rising EMIs. The question is how does one get the extra money from? Should cutting down on expenses be an option or can you make any other arrangements?

Rising Interest Rates And Its Impact
Accepting the problem is the first step towards exploring a solution. So, first of all we must accept the reality that these rate hikes by the RBI would definitely impact us. There are many people who ignore these important developments thinking that these would affect the banks and not them. However, the reality is that ultimately the costs will be passed on to the end consumer and they will have to pay for them through increased interest rates and consequently higher EMIs.

Suresh Sadagopan, a well-known financial planner, says, “The move by the RBI will have a direct as well as an indirect impact on the ‘aam aadmi’. Anyone who has borrowed money will find their EMIs going upwards, which is the direct impact. Businesses borrowing money to do business would find that it has become costly now and would seek to pass on the cost back to the consumers, which will result in increased prices for many items across the board. This is the indirect impact.”

“People with surplus money will be able to get bank FDs and corporate bonds at higher yields while those who need to borrow will have to pay at higher interest rates. People who have already borrowed on floating interest rates will need to pay back at higher interest rates,” says Mukesh Dedhia, a financial planner. However, Srikanth Bhagavat, MD, Hexagon Capital Advisors, begs to differ. He feels that in cases where the EMIs will increase - broadly at current rates these may have increased by about 10 to 15 per cent over last year’s EMI - unless the borrower has over-lever-aged, it should not be difficult to manage the situation. An increase in EMI of Rs 2,000 or Rs 3,000 should not stress the borrower too much in a normal situation.

But the last year has impacted the borrower in two ways - increased interest rates and increase in cost of living due to inflation. Bhagavat adds, “For someone whose EMI constitutes more than 40 to 50 per cent of his/her income, it could prove more difficult to manage. The increased EMI will eat into the home budget and may result in a decreased spend on consumables (due to a lower disposable income) or discretionary goods such as an expensive soap or toothpaste or a dinner in a restaurant. Savings will obviously reduce unless the borrower is on a strict SIP diet. Where the borrower is on a teaser loan, god help him, for the increase will be much more by the time the borrower reaches the second or third year of his/her loan.”

 

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