A small increase in EMIs can cost you a bomb across the loan tenor

It was the fourth of May this year when the banking regulator surprised the markets and banks alike by raising the repo rates by 40 basis points out of the blue.

This, as one would expect, led to the raising of lending rates by banks and subsequently, EMIs rose marginally.

But the RBI did not stop at just one hike. The two successive monetary policy committee (MPC) meets in June and August also saw the raising of repo rates by a total of 100 basis points, i.e., an increase of 140 basis points between May 4 to August 5 this year.

One might think that the increase in EMI turned out to be small but not many of us realise that this little increase accumulates to a considerable sum over a period of 15 or 20 years.

Here we explain what exactly does it mean!

As we can see in the table above, the increase in EMI for ₹50 lakh loan is only ₹767, but over a period of 20 years, the total interest outgo would increase by ₹1.84 lakh — a considerable amount when seen in the backdrop of ₹767.

And when the tenure is less, say 12 years, the difference in EMI would be only ₹679, but the total interest outgo over a 12 years period would increase by ₹98,000 — as shown in the table below.

Similarly, when the loan tenor is 15 years, the figures would change. For a loan of ₹50 lakh, the difference in EMI is ₹713 but the total difference in the EMIs over a period of 15 years would be ₹1,28,371.

And now let us suppose, your bank has raised the overall lending rate by 90 bps in past four months (instead of 25 bps as assumed in the above illustration) ever since the RBI raised repo rates by 40 bps on May 4.

So, in case your bank has raised the lending rate by, say, 90 basis points from 7.5 to 8.4 percent for a ₹50 lakh loan across 20 years, then the EMI would increase by ₹2,795 from ₹40,280 to ₹43,075 a month.

This would trigger a total increase of ₹6,70,936 in the interest outgo over a 20-year period.