Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Indian Stock Market News, Equity Market and Sensex Today in India | Equitymaster
  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

EMIs: Nowhere to go but up
Fri, 9 Sep Pre-Open

The Reserve Bank of India (RBI) has already hiked key interest rates 11 times in 18 months to stop the uptrend in inflation. The Repo and the Reverse Repo stand at 8% and 7% respectively. Banks borrow from RBI at the repo rate and deposit with RBI at the reverse repo rate. For banks, this means increase in cost of funds and for the loan borrowers, it means increase in cost of loans. The banks have been quick to pass this extra burden on to the customers. So ultimately it is the loan borrowers who are left to bear the pain.

There are two ways to shoulder this burden. Either by increasing the duration of the loan or by increasing the equated monthly installments (EMI).

Whenever interest rates increase, the banks first try to increase the loan duration because it enables them to earn more. But there are limits to which the duration of the loan can be increased. One cannot increase it indefinitely because of limits relating to the age and income of the borrower and also because it would affect credit quality of the banks. The increase in duration is never beyond the age of 60 - 65 of the borrower. When interest rates rise to a point where an EMI payment cannot cover the interest payment, banks typically raise the EMIs to ensure they cover the interest on loan. The banks have already agreed for zero charges on prepayment of loans and have extended the duration of the loan wherever possible.

So the next option for them is to increase the EMI. Loan borrowers can brace themselves for increase in EMI in the coming months. But it may not be all bad news. Though increase in EMI will stretch the customer's finances in the short-term, it will save them substantial amount in terms of future interest outgo. When the loan duration is increased, the sharp rise in interest outgo happens because interest payments make up a much higher proportion of the initial EMIs and principal repayment gets pushed further into the horizon. As long as the principal remains unpaid, it continues to bear interest. The trade off is short term pain for long term gain.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

Read the latest Market Commentary

Equitymaster requests your view! Post a comment on "EMIs: Nowhere to go but up". Click here!


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Feb 22, 2018 (Close)