How do you manage your budget and loans when inflation is high and interest rates are rising

Introduction

Recently, in May and June 2022, the Reserve Bank of India (RBI) increased the repo rate by 90 basis points. As a result, several banks and financial institutions raised their interest rates on home loans, auto loans, and personal loans. If you take out a loan at a floating interest rate, your Equated Monthly Instalments (EMIs) or loan tenure will also increase.

To add to this, the rising inflation rates have already caused the prices of commodities to soar. Moreover, it can become really difficult for you to manage your budget amid the soaring prices and increasing loan EMIs.

What happens when inflation rises?

When the inflation rate rises, the costs of commodities increase or in other words, the value of money starts decreasing. Consumer financing products, such as loans and mortgages become expensive as the interest rates also move in the same direction as the inflation rate. While the inflation rate depends on a lot of factors but to control the inflation, RBI can change the interest rates.

Cumulatively, these factors start putting pressure on the pockets of general consumers. However, at the same time, higher interest rates also mean that you will start earning more on your bank deposits, and other fixed-income investments. So, to combat the impact of the rising inflation and interest rate, you need to alter your spending and investing habits.

Tips to manage your budget and EMIs during rising inflation and interest rates

There are several ways to control your loan EMIs and budget when the interest rates and inflation are rising. Read the tips mentioned below:

1. Increase your investments in fixed-income instruments

When the inflation rates are increasing, equity instruments tend to provide lower returns as their prices start declining. However, as the interest rates also increase, fixed-income instruments, such as fixed deposits, RBI bonds, Public Provident Funds (PPFs), etc., start providing higher returns.

Hence, it could be a good idea to increase your investments in fixed-income instruments, bonds, and debt securities during these periods. By doing so, you can earn more and offset the extra money that you might have to pay due to increased loan EMIs.

2. Find ways to control your expenses

There are two types of expenses you may incur—utility expenses and lifestyle expenses. While you can’t control the necessary expenses, such as loan EMIs, utility bills, school fees, grocery costs, etc., you can control your lifestyle spending. These may include buying clothes when you don’t need them, dining at restaurants, beautifying your house, etc.

By curbing your unnecessary expenses, you can increase your savings and also maintain your monthly budget when the prices of other things are skyrocketing.

3. Increase the tenure of your loans

Several lending institutions allow you to increase or decrease the tenure of your loans mid-way during the loan periods by adjusting EMIs. When the interest rates are becoming higher, you can increase your loan tenures to control your EMIs. However, this option must be opted only if cannot afford increased EMI.

Suppose you’ve taken a home loan of Rs. 40 lakh with a tenure of 20 years and at the rate of 7% per annum. Now, if the bank has revised the interest rate to 7.40%, you can increase the loan tenure by few months to keep your monthly EMIs same. An increase in loan tenure depends on the outstanding loan amount or how many EMIs you have already paid.

4. Try to make part pre-payments

Almost all lenders allow pre-payment and part pre-payment facilities on loans. In other words, they allow the borrower to close or reduce the loan before the end of its tenure. So, if you have sufficient funds with you, you can make part pre-payments to reduce your loan amount during rising inflation rates.

When you reduce the principal amount of your loan, the EMIs that you have to pay every month also decrease. Hence, the impact of the increased interest rate cancels out. You can also choose to opt for reduced loan tenure.

5. Opt for a home loan balance transfer

You can also opt for the home loan balance transfer facility if you feel that your current lender is charging you a higher interest rate. This facility allows you to shift your outstanding home loan amount with another lender offering better lending terms.

If you are getting a home loan at a reduced interest rate from another lender, you can shift your outstanding home loan amount to benefit from reduced EMI or tenure. To get the right home loan, you can check the market and compare quotes from various lenders.

To conclude

Inflation rates and interest rates are beyond your control. These rates depend on various economic factors. Even if inflation rates and interest rates are soaring, you can still control your budget and loan EMIs with a few changes in your financial habits and loan parameters.

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