How to manage rising loan interest rates

High and rising inflation is forcing interest rates for loans to rise. Here is a survival guide to adapt and survive the emerging harsh realities

Worryingly, experts do not expect the central bank rate hikes to be enough to bring down inflation. Across the world, it is expected to remain substantially higher than levels that existed before the outbreak of the global pandemic in 2020.

High inflation and rising interest rates are already causing economic downturn across the globe – a trend that is expected to gain pace in the future. This is likely to impact future pay hikes and job security, along with limiting investment income due to heightened volatility in financial markets. These conditions combined are creating new challenges for borrowers seeking new loans and those repaying existing ones.

Recent rate hikes have already pushed up interest rates on various loans, a trend also expected to continue in the future. Loan EMIs – be it for homes and cars, personal loans, or outstanding credit card balances – form a significant portion of many home budgets across the world.

How can one adapt to the emerging harsh realities? Here is a survival guide.

Survival guide during rising loan rates

The specific steps you need to take to adapt to rising loan rates will depend on whether you are planning to take a new loan, or repay existing ones.

Assess your situation. If it is your first loan, or you want a fresh loan after having fully repaid previous loans, first assess the impact of rising interest rates on EMI affordability, home budget, and interest pay out during the loan term and overall finances. Consider pruning the loan amount if you are planning to operate at an extreme margin of affordability.

Situation 1: Little impact

The overall impact of rate hikes will not be significant if you have no outstanding loans and the likely burden from loan EMIs are manageable – such as 10-20 per cent of take-home pay. For outstanding loans nearing the end of the term, typically with a higher principal repayment component in EMIs, a response may not be justified since effort and costs will outweigh savings in interest costs.

Situation 2: Significant or alarming impact

In this case, you will need to reduce the loan repayment burden. In extreme cases, for people with multiple loans struggling with repayment, the overall debt burden will need to be reduced with an action plan covering all loans.

Let us discuss the two scenarios in some more detail.

Article originally published on Khaleej Times

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