EMI- a boon or a bane?

All of us have that one relative, friend or acquaintance who is in constant need of money to repay their debt. But, surprisingly they always have the latest amenities, products and services that are launched in the market. These people usually take advantage of a benefit that has been extended to us by financial institutions- EMI. Most of us have either availed the service or at least heard about it. Did you know that EMI is an acronym for Equated Monthly Instalments and not Easy Monthly Installments? EMI is a fixed amount paid by a borrower to its lender every month. It includes the principal amount and the interest to be paid for each month until the loan is fully paid.

But in this materialistic world, a lot of people buy luxury goods even when they cannot afford it. In such cases, they opt for EMIs. But everything comes at a cost. 

A numerical example of interest on EMI is given:                                                                                                            

Loan Amount

Rs.27,000

Interest Rate

5%

Loan Tenure

9 months

Monthly Payment(principal + interest for that month)

Rs.3063

(Where Rs.3,000 is the principal amount to be paid for that month and Rs.63 is the interest)

Total Repayment Amount

Rs.27,567

Total Interest Amount

Rs.567

Did you know that if you miss paying your EMI thrice, you will be sent a legal notice and banks might seize your assets? That one phone or home theatre that you buy on EMI could cost you more than it originally costed! 

Why is your big fat cheque not enough to clear off EMI?

Debt traps a.k.a death traps: EMI is nothing but a fancy term for debt. Debt means borrowing funds from someone and promising to pay them back with interest.  Not only does an EMI burn a huge hole in our pockets but also push us into a debt trap where we are stuck in a vicious cycle of borrowing, spending, and repaying again and again. When we buy something on credit, then we have more money in our hands to buy goods on credit/EMI. Hence, we keep falling into debt traps. These debts generally stay with us for months, or at times, even years. 

Did you consider contingencies before taking an EMI? Life is unpredictable. Life-altering decisions like overseas education, marriage, change in family structure can cause a sudden, unexpected change in the budget. Health problems are often one of the main reasons behind the change in our budget. Sometimes we have to spend more on medicines than we had planned to. There are many other changes like loss of a job, delay in receiving salary, loss in business, etc. that can delay our EMI payments. Most of us have a monthly budget depending on which we make most of our transactions. Now that the budget is set, after making all the regular transactions and savings when the time comes to pay back our loans, we generally get stressed and find it difficult to make a huge change in our financial plans to pay back for that luxury item that we enjoyed.

Increase in income leads to an expensive lifestyle: Sometimes we buy products of a particular brand just to maintain our status. As our income increases, our expenditure also increases. We then prefer to spend more on branded goods, processed foods, and discretionary expenditure.

To do all of this, people start borrowing more money and fall into the debt trap. EMI is one of the main reasons for the shift in consumer behaviour. Several companies are offering EMI on their products to attract more customers. In India, EMI is being offered on debit cards and credit cards both. If we spend the extra money we earn on our expensive wants, then we will be stuck in a cycle where we need extra money, year after year just to maintain our lifestyle.

Pro-Tip: You must learn to differentiate between your needs and wants. If you are a family of four and you take an EMI for an expensive car like Audi, when you already have a car, then it might not make much sense. Whereas, taking an EMI for your first, affordable car may not be an issue as this is something that will help your family lead a better life. The next time you get a pay raise, resist the urge to add more to your table full of expenses.

Your spouse’s spending habits: Your spouse and you might have different ways of managing money. Both of you can have conflicting spending habits and this might affect one of your credit structures. Therefore, your partner’s decisions may impact your financial condition. It is always better to discuss, plan, and then take any step to avoid such situations.

 

EMI is a valuable tool if used properly, but due to poor knowledge and/or lack of financial planning (to know more click’, we are unable to enjoy its benefits. Hence, a proper plan should be executed before taking a loan and that plan should be followed while paying the EMI. A holiday on EMI can get you good pictures but the struggle to pay it back is something you don’t want to go through.

Team Investoday