June 24, 2007
The Economic Times (Delhi edition)

There have been frequent increases in interest rates on housing loans over the past couple of years. The banks and housing finance companies, in order to recover the higher interest, have been increasing the EMIs (equated monthly instalments). An EMI comprises two components - principal and interest.

Generally, the EMIs remain constant over the tenure of the loan. The loan amount plus the interest for the loan tenure divided by the tenure of the loan (in months) gives the EMI. The amount of EMI to be paid depends on various factors which include the amount of loan, tenure of loan, rate of interest, mode of calculation of interest - daily reducing, monthly reducing, quarterly reducing or annual reducing.

The tenure of the loan is an important determinant of EMIs. One can avail loans for various tenures ranging from five to 25 years. Longer the tenure of the loan, lesser is the EMI and vice versa. The longer the tenure, higher is the interest rate - because of the increased risk of the bank, and higher is the interest amount in absolute terms because of the longer tenure. However, the EMI is lower because the loan and interest are spread over a longer tenure of time. Shorter the loan tenure, higher is the EMI. The shorter the tenure, lower is the interest rate - because of the reduced risk of the bank, and lower is the interest amount in absolute terms because of the smaller tenure. However, the EMI is higher because the loan and interest are to be repaid over a lesser tenure.

Generally, in case of change in the interest rates, the EMI amount is not disturbed. To adjust for the increase or decrease in the interest rates, the tenure of the loan is increased or decreased as the case may be. However, with the recent frequent increases in the interest rates, the loans have stretched to the maximum tenures possible. The banks have now started increasing the EMIs payable by the borrowers. This tends to disturb and upset the cash flows of the borrowers, as they are required to pay more, which was not planned for. This is applicable in case of floating interest rate loans. The only option available for borrowers is to repay a portion of the loan so that the EMIs remain the sane.
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