• News
  • Columns
  • Interviews
  • BW Communities
  • Events
  • BW TV
  • Subscribe to Print
BW Businessworld

Bank Rates Hike: Deduct Tenure Or EMI?

As the banks increase interest rates after the hike in RBI's repo rate, people face a difficulty to between the reduction of EMIs or Tenure

Photo Credit :


With the change in Reserve Bank of India's (RBI) repo-rate, the interest rates of other banks change as well. Just after the announcement of the increase in repo-rate by RBI last week, many government, public and private banks have been increasing their interest rates. In such a situation, it becomes difficult for a customer to choose whether to reduce the loan tenure or the EMIs.

A tenure is the time period, one is given to repay a loan. Almost all types of loans have a loan tenure such as personal loans, business loans, car loans, education loans, and home loans.

An EMI is Equated Monthly Installments comprising both principal and interest that a person pays to repay a loan. Repayment through EMI starts from the month following the month in which one takes full disbursement.

A tenure and EMI are co-related. The longer the tenure of the loan, the lesser will be the monthly EMI outflow. Shorter tenures mean greater EMI burden, but the loan is repaid faster. If a consumer has a short-term cash flow mismatch, the bank may increase the tenure of the loan, and the EMI burden comes down. But longer tenures mean payment of larger interest towards the loan and make it more expensive.

Ambuj Chandna, President – Consumer Assets, Kotak Mahindra Bank said, "A customer may have other obligations to fulfil from his/her income post servicing the EMI. A sudden increase in installment could impact the household budgets and result in EMI bounces. Thus, it is better to adjust the rate increase via the tenure of the loan. Naturally, this is subject to other parameters like adequate room in the serviceable age and applicable policies."

Why do banks increase tenures instead of EMIs?

Bank offers a timetable of EMI at the time of payment of credit. If one reimburses according to the timetable, the loan will be cleared toward the finish of timetable.

However, the decision remains up to the consumer. One can reimburse extra, that is known as extra remmittance. This can also be done through net banking.

Going for extra remmittances, one can save a lot of the interest. For instance, if someone picks 240 months, there is chance he can clear the loan in 200/220 or in much lower period by paying extra. Paying EMIs according to the timetable, a customer winds up paying higher interest.

Other than that, the loan EMI is calculated/fixed as per to the individual's income. Whenever loan interest rate increases, the bank either increase the present EMI or the repayment period. As banks do not have any latest information of an individual's income, it is easier to increase loan tenure based on their old income statement.

Deduction of Tenure or EMI?

Definitely, people get confused with the calculations on choosing whether reducing the tenure or EMI. One has the option of lowering the loan tenure in their bank. Both the customer and bank see deduction of tenure as a better option than deduction of EMIs.

If a person can afford paying the higher EMI, so it is better to reduce tenure. It will lead to much amount of interest savings.

Now if someone is unable to pay the EMI, definitely he should ask the bank to lower EMI. This will increase the tenure but be a less burden on one's salary. "The customer needs to contact the bank and convey their interest and ability to service an enhanced installment", Chandna said.

"The loan agreement covers variable rates and the likely impact of rate variations over the tenure of the loan. The consumer is aware that the rates may vary basis change in repo rate by the RBI. Any change in the outstanding tenure of the loan or the equated installment, as the case maybe, is communicated to the customer post factor. The customer can approach the bank in case they want the impact of the rate increase to be given on the EMI and not on the tenure.  The request is then taken forward as per the defined policy and process of the bank", he said.

Tags assigned to this article:
reserve bank of india repo rate emis Loan Tenure