Curated By: Business Desk
Last Updated: August 17, 2023, 13:16 IST
The dream of owning a car or a house often involves availing loans and repaying them through equated monthly instalments (EMIs). While standard EMI plans come with long tenures, there’s a beneficial option to expedite loan repayment – the step-up EMI. This innovative feature offered by banks acknowledges that borrowers’ incomes typically increase over time. By structuring EMIs to start lower and gradually rise, this method proves advantageous for quick loan settlement.
In a step-up EMI arrangement, the bank takes into account the anticipated rise in the borrower’s income. Recognizing that a substantial EMI may not be feasible initially, the bank designs the plan to begin with lower instalments, gradually increasing them as the borrower’s income progresses.
Determining the EMI
Upon loan approval, the repayment timeframe and the number of EMIs are established. While a fixed EMI amount is common, opting for the step-up EMI route during the loan finalization can be advantageous. For instance, if your initial EMI is Rs 25,000 and you choose a 5% step-up EMI, your EMI will increase by 5% each year. Consequently, a payment of Rs 25,000 in the first year would rise to Rs 26,250 in the second year and Rs 27,562 in the third year. This pattern continues until the loan is repaid.
Benefits of Step-Up EMI
The primary advantage of step-up EMIs is the reduction in loan tenure, facilitating quicker repayment. If you’re initially scheduled to repay a loan over 20 years, opting for step-up EMIs can enable you to become loan-free in less than the stipulated period.
Potential Risks
While step-up EMIs offer distinct advantages, they are not devoid of risks. The key risk involves the rapid increase in EMI amounts. If a borrower’s salary doesn’t increase proportionally to the EMI hike, it can potentially lead to financial strain. Defaulting on an EMI payment may attract penalties imposed by the bank.
