What To Do When Interest Rate Goes Up?

As interest rates continue to rise, especially in the past few quarters, opting for a loan has become more and more difficult. According to financial services industry trends, the interest rate is only expected to rise further. In such times, the borrower needs to tighten their wallets and find out ways to reduce the impact. There are ways in which you can save a significant amount of money if only you be a little bit more vigil, well informed and proactive.

What can you do for Home loans?
There could be tough times ahead for home buyers since that is usually the largest loan one has. Many banks today are charging from 8.5% to 10% which is a far cry from a few years back when interest rates were as low as 6%. With such rates, your monthly EMIs won’t be affected but your total payable interest will certainly go up and the tenure of your loan. Following are just some of the key ways in which you can tackle this situation and save more than a few bucks!

1. Increase your EMI instead of tenure
Most of the lenders will extend the loan tenure instead of increasing the EMI itself. A smart borrower should increase the EMI and look out for a tenure deduction to save from paying more than what they had planned for.
For instance, let us take a look at the example below to have a more clear understanding

As you can see, when there is a hike in interest rate and the tenure increases, you end up paying ₹84,978/- more than your actual payable. However, if you only increase the EMI amount by a meagre ₹120/- you must pay only ₹21,294, which is much lesser than the amount you had to pay in case your tenure was increased. This is just an example and you can save depending on your requirement.

2. Pay off a goodly chunk
If you are able to, pay off the loan as much as possible to reduce your tenure. In this way, you will be saving a lot of excess money which would’ve been spent and will also relieve the mental burden. In the above example, you can pre-pay Rs 15000 and keep the EMI and tenure same, neutralizing the impact of interest rate hike. You may know that pre-payment on home loans do not elicit any charges.

3. Review how your interest rate is pegged
Over the years, RBI has issued guidelines to banks and housing finance companies to keep changing the pegging for home loan interest rates. You would have heard terms like PLR, Bank Rate and MCLR. MCLR is the latest reference for lending rate by banks, and it allows better benefits for consumers. Do ensure your home loan interest rate is now pegged to MCLR and not to Bank rate, if you have taken loan from a bank.

4. Switch your lender
As a final option you can also consider switching your lender. While changing lender could result in saving on total payable interest, you should also take into consideration other expenses such as processing charges and documentation fees. If you are saving more in Interest after the payment of a few thousands as processing fees, then that would be a good deal. However, if you are closer to the completion of your loan, it would not make much sense to peep into other schemes. While you’re at it, make sure that your credit score is not hampered or affected due to multiple inquiries.

Tips to Avoid splurging On Your Diwali Bonus Today For A Better Tomorrow

Besides lighting diyas, exchanging gifts with your family and friends and making a handful of joyous moments, Diwali also brings cheer in the form of bonuses from work. You often make a never-ending shopping list as you have that hefty Diwali bonus to bolster your spending intentions. While it’s okay to splurge a little from it, this money should be wisely used to help you reach your long-term financial objectives. We often forget that the habit of saving and investing smartly lead to wealth creation rather than indulging in extravagance. For those who lack a clear plan on what to do with the bonus money, here are some tips that will help you spend wisely and make the most of your Diwali Bonus:

Prepare a Diwali Shopping List
Diwali is a festival where people tend to overspend or do most of their major shopping because at this time of the year all the exorbitantly priced things are sold at discounted rates. However, before you spend your hard-earned money mindlessly, consider preparing a Diwali shopping list. Every item, that you’re likely to buy for Diwali should be included in your list. Once the list is ready, scrape out the things that you can skip buying and make do with your existing things. Identify the items that you really require in that month and eliminate the ones that seem unimportant. A well-prepared shopping list will help you save money from the bonus and prevent you from being an impulsive shopper.

Pay off high-interest debt
Double-digit interest on a loan can be harsh on your financial stability, especially if you have been trying to clear it for a long time. You should use your bonus at this time to repay any high-interest debts before shopping for frills. Financial experts say that an individual’s priority must be to do away with the debt that has an interest rate more significant than what you could earn on that money elsewhere. Paying off debt can ensure peace of mind and help you clear your finances for other expenses.

Create an emergency fund
It’s a good idea to have an emergency fund that can meet 3-6 months of living expenses. This can ensure a stress-free lifestyle if you were to face an unexpected and costly medical issue, or unable to work for any reason. An emergency fund offers much-needed liquidity in the event of an unanticipated expense. With an emergency fund at hand, you may not have to apply for a high-interest loan to handle a crisis.

Keep an Eye for Festive Loan Offers
On Diwali, people welcome wealth and prosperity into their homes. Therefore, buying gold and other expensive items such as a new house or a car during this festive season is considered to be auspicious. If you’re planning to buy a car or a house, this is the great season to do so as a lot of banks offer great deals on various types of loans such as car loans and home loans. Invest your bonus money in a planned way to get the most out of it.

Avoid hasty decisions that harm your Credit Score
Mindless decisions that affect your credit score and reports should be avoided instead you should always take decisions that will improve your credit score further. Random purchases or loans that are difficult to repay later would refrain you from achieving stability in your finances. Make sure you plan and chalk out the ‘can’ and ‘cannot’ to stay informed and aware.

Keep a check on your credit purchases.
When you purchase on credit it is essential to constantly calculate and set all due dates as a reminder. It is essential to keep your credit card purchases under control as exceeding limits could affect your credit score and credit report directly. Also, to maintain a healthy credit score one must repay the credit card dues on time because any delay would hamper it.

Diwali bonus and the festive discounts will make every deal look very alluring but refrain yourself from buying unnecessary things and pre-plan your expenses during the festivities. Be a smart consumer and get the maximum benefits from the dealers.