Personal loan: How a slight increase in interest rates can raise your EMI | Mint

If you have been scouting for a personal loan and have already received a few offers from different banks, it is recommended that you compare the impact of the difference in interest rates on your EMIs.

Let us examine this in detail

For instance, one bank offers a ₹10 lakh loan at an interest rate of 11 per cent a year for a five-year period, while another offers a loan at 12.5 per cent over the same period.

Likewise, another bank offers loan at 13.5 percent interest over the same loan duration. And finally, in the fourth scenario, the bank charges 14 percent interest for this loan.

So, there are four different scenarios. One can compare the impact of different interest rates on the loan EMIs by using a personal loan EMI calculator.

Scenario I: When the interest rate is 11 percent, the loan EMI on ₹10 lakh loan will be ₹21,742, thus taking the overall cash outgo to ₹13,04,520.

Scenario II: When interest rate is 12.5 percent, the loan EMI will be ₹22,497 which takes the total cash outgo to ₹13,49,820.

Scenario III: When the interest rate is even higher at 13.5 percent, the EMI on ₹10 lakh loan will be ₹23,009, which means the total cash outgo will be ₹13,80,540.

Scenario IV: Finally, when the interest rate is 14 percent, the EMI on ₹10 lakh loan will be ₹23,268, which means the total cash outgo will be ₹13,96,080.

(Source: livemint.com/loans/personal-loan-emi-calculator)

As we can see in the table above, a marginal increase in interest rates from scenario I to IV takes the monthly EMI from ₹21,742 to ₹23,268. This also raises the overall cash outgo by ₹91,560.

The difference in cash outgo in Scenarios II and III (in comparison to Scenario I) is ₹45,300 and 76,020, respectively.

These figures were computed using the personal loan EMI calculator that reveals that a marginal increase in the rate of interest can cost you dearly. In the above illustration, we have ascertained that the total cash outgo can be as high as ₹91,560 when the rate of interest is raised from 11 to 14 percent on ₹10 lakh loan.

One can now ascertain the total difference in cash outgo when the loan amount is raised even higher.

(Note: Remember that raising a personal loan has its own set of risks)