Will Demonetization Lower Loan EMIs?
Last Updated : Nov. 18, 2016, 12:14 p.m.
The recent announcement by PM Modi to ban Rs. 500 and Rs. 1000 notes , is the most discussed topic everywhere. With the act of stripping higher currencies and introducing new ones, India is heading towards an economically strong nation. But, what will be its effect on the ground level? Will demonetization lower loan EMIs that you have already taken or are thinking of pursuing?
Also, Read What demonetization means for the salaried?
Experts say that the scrapping of higher currency notes is most probably going to result in lowering the interest rates and will attract more loan borrowers. The loan affordability will rise as the repayment will become smoother with 2017- EMIs to fall soon.
Now, let us see what will happen if home loan interest rates go down.
Amit Agarwal, a 25 year old professional gets the in-hand salary of Rs. 35,000 per month. Last year, he took a home loan of Rs. 15,00,000 for 20 years tenure at the interest rate of 12.50% p.a. Is this ban on Rs. 500 and Rs. 1000 notes is a relief for Amit? Well, it is expected that the interest rates might go down by 1 to 2%. Now, how will this cut-down rate help Amit in paying off his home loan EMIs? Here is the table which shows the difference between old interest rates and the new ones.
If the rates come down by 1% i.e., rates come down to 11.50% p.a, the changes in EMI will be:
| Tenure (in Years) | Loan Amount (in Rs.) | Existing Interest Rate (p.a) | Existing EMI (in Rs.) | New Interest rate (If cut down by 1%) (p.a) | New EMI (in Rs.) | Difference (in Rs.) |
|---|---|---|---|---|---|---|
| 20 | 1500000 | 12.50% | 17042 | 11.50% p.a. | 15996 | 1046 |
Also, the total interest that you at 12.50% p.a. is Rs. 25,90,106/- which will come down to Rs. 23,39,147/- that is the difference between the total interest paid will be Rs. 2, 50,959/-.
If the rates come down by 2% i.e., rates come down to 10.50% p.a., the changes in the EMI will be as follows:
| Tenure (in Years) | Loan Amount (in Rs.) | Existing Interest Rate (p.a) | Existing EMI (in Rs.) | New Interest rate (If cut down by 1%) (p.a) | New EMI (in Rs.) | Difference (in Rs.) |
|---|---|---|---|---|---|---|
| 20 | 1500000 | 12.50% | 17042 | 10.50% | 14976 | 2066 |
Also, the total interest that you at 12.50% p.a. is Rs. 25,90,106/- which will come down to Rs. 20,94,168/- that is the difference between the total interest paid will be Rs. 4,95,938/-. You can clearly see the difference between the EMIs as per the new and old rates on the home loan.
Banks have so far accumulated 5 lakh Crores and as the days will pass, the funds will mount up. In such scenario, it is expected that RBI will cut down the lending rates to attract more people to avail a loan. So we think not only will this demonetization lower loan EMIs, but it will slash the market as a whole too.