Finding it difficult to pay EMIs? Here are solutions to resolve burden

Negotiate with the bank for better terms, or seek a moratorium

With interest rates rising, loans have become more expensive. For example, State Bank of India hiked its one-year marginal cost of lending rates several times during the year. 
 

Currently, it stands at 8.55 per cent, up from 7.95 per cent, in January 2018. Many are likely to feel the pinch of the rising rates. If you’re finding it difficult to pay the equated monthly installments (EMIs), there’s no need to sweat. Instead of defaulting, there are better ways to pay up the EMIs.

Reschedule: This means asking the lender to increase the tenure of the loan as it reduces the EMI amount. Suresh Sadagopan, certified financial planner (CFP), and founder, Ladder7 Financial Advisories says, “If the EMI is reduced and the loan tenure is lengthened, it will help those who want to increase their monthly cash flows, and are on a tight budget. The interest they pay over time may be more, but is a small price to pay. That is, for a Rs 5 million loan for a tenure of 15 years, the EMI is Rs 50,713 at an interest rate of 9 per cent. After a year, if the rate increases to 9.5 per cent, the new EMI will be Rs 53,776 for the remaining 14 years. But, if you increase the tenure by six years, the EMI will fall to Rs 46,486, even at a rate of 9.5 per cent.

Restructure: This is where an individual has to negotiate for a better deal with the existing lender to get a better interest rate, especially for credit cards. Sadagopan says, “When someone has over-leveraged and has credit card debts, they are prone to go into a debt spiral. They may not even be able to pay the minimum amount due or may just pay the minimum amount, and not clear the loan. In such a situation, a debt restructuring with the credit card issuer may work. But, this can be tried only in extreme cases as it affects the credit score.” Mumbai-based CFP Kiran Telang says: “It is advisable to pay the credit card in full. But if it’s not possible, and the amount is high, it makes sense to take a personal loan at a lower rate, and pay it off sooner rather than revolving a high balance and paying high interest.”

Deferment: Being honest to the lender about your financial situation is a good idea. Mumbai-based CFP, and founder partner of Srujan financial advisors, Deepali Sen, says: “One way to take care of an EMI burden is to ask for a deferment — a short moratorium. The bank may agree that you only pay the interest part of the EMI, and pay the principal later. But with deferment, the customer has to bear the added burden of paying the deferred principal amount at a later date.”

Switching: The above options will help sail through a rough patch, where one cannot service the EMI for a short duration. A more permanent solution would be to switch the loan to another lender, who offers better terms and a lower interest rate. The EMI will get reduced at a lower rate. But, do take into account the total cost of the loan, including the prepayment penalty to the existing lender, and processing charges to the new lender.

Finally remember, most lenders don’t want to lose a good customer. If you are going through a short-term financial problem, talk it out with the lender.