Banks’ lending rates have risen by around 200 basis points in the last 12 months. Are you finding yourself in a situation where servicing higher equated monthly instalments (EMIs) is becoming difficult for you? There are four ways through which you can decrease the EMI burden. Of course, you will have to negotiate hard with your bank for one of these to work for you, but then it’s worth the try.
Simply put, the lender will increase the tenor of your loan, reducing the EMI. For instance, for a Rs 50 lakh loan and a tenor of 15 years, the EMI comes to Rs 53,730 at 10% interest rate. After a year, if your interest rate increases to 11%, your new EMI will become Rs 56,681 for the remaining tenor of 14 years. But if you increase the tenor by another six years to 20 years, your EMI will fall down to Rs 50,045 even at 11% interest rate.
But do keep in mind that when you increase the tenor of the loan, your total interest payout goes up and hence your loan becomes more expensive. Rescheduling can work for home loans, education loans, car loans and personal loans.
Here you will have to convince your lender to give you a better deal as far as interest rates go. Though this strategy typically works for credit card debt, but if you have good relations with your bank, it may restructure rates for home loans too. This strategy will need tough negotiation on your part.
If you are expecting a lump sum in the near future, you can tell your bank that you will not be able to service EMIs for a particular period but assure repayment after the said period. For instance, if you expect a lump sum after four months as a bonus from your employer, you can ask the bank to defer the principal part of your EMI for four months; you can’t escape servicing the interest part of the EMI. After four months, you can use the lump sum to repay the principal.
While the above options are temporary solutions, a permanent solution is when you switch a loan to another lender at a lower interest rate. The EMI will get reduced on a lower rate. But do take into account the total cost of loan, including the prepayment penalty to the existing lender and processing charges to the new lender.
Do remember that it would be slightly easier for you to tap into the above options if you have had a good repayment history. Of course, good negotiation skills will help.