Some tips to help you cope with higher EMIs without the risk of defaulting

Many borrowers, especially those who took a home loan when the rates were very low, are feeling the pinch of the higher rates prevailing now.

To understand the impact of the increase in rates on your Equated Monthly Instalments (EMI) outflow, consider this example. Five years ago, interest rates were at an unbelievable low of around seven percent. Suppose a borrower, takes a loan of Rs 50 lakhs for a tenure of 20 years, his EMI outflow comes to around Rs 39,700 at seven percent. For the same loan amount and tenure, consider the current rate of 13 percent. The EMI outflow comes to around Rs 58,500. If a borrower's income level has not risen up by this amount, then managing loan repayments becomes a tough task.

Here are a few tips that will help you cope with increase in interest rates:

• If you have money in instruments like fixed deposits or some surplus cash, consider prepaying partially. This way the increase in EMI outflow due to rate increase can be nullified.

• Consider paying off high interest debts first. Credit card penalties are huge. If your finances are simply unmanageable avoid using the credit card and transact in cash only.

• Rework on your budget if your incomes have stagnated and interest rates are shooting upwards. Make lifestyle changes and avoid high expenses.

• Consider refinancing if another lender offers a much lower rate. Some lenders who offer lower rates only to new customers and not to the existing ones must be avoided.

• Increasing the loan tenure brings down the EMI due every month to affordable levels. However, you pay more to the lender in the form of interest on the loan.

• Keep a tab on your monthly expenses, long-term financial commitments and other debts. Continue setting aside a small portion of your income towards a contingency fund.

• Do not indulge in debts.

Borrowers hold high emotional bonding to their homes. Defaulting is their worst nightmare. If you feel making EMI repayments an arduous task, contact your lender. You can try to workout a suitable repayment option and avoid defaulting.