How Ban on Rs.500 and Rs.1000 Notes can Affect Loan EMIs

In a bid to clampdown on black money, the government’s decision to ban higher denomination currency notes of Rs.500 and Rs.1000 could result into significant economic benefits in the long run, including lower interest rates of loans, resulting into the reduction in EMIs.

So, if you already have a home loan, personal loan or car loan or looking to avail the same, a good news is awaiting you. Read the article further to soak in the comfort that is set to welcome you in terms of lower interest rates and EMIs.

Rising Liquidity to Bring Down Loan Rates: Yes, you read that right. Banks are flushed with liquidity with more than 2 lakh crore aggregate deposits so far. And, if experts and economists are to be believed, this rising deposit could soften bonds yields, which in return would lower the interest rates of loans in the future. Moreover, the crackdown on black money has hit the circulation of money in the market, which could drive down the prices and the inflation.

With people having less cash in hands, the economic growth can take a hit, leaving more room for RBI to cut interest rates further.

Let’s get more clarity on the same with the help of an example below:

Suresh Jain, a 27 year old professional working in a leading MNC, withdraws a salary of Rs.35,000 per month. He took a home loan of Rs. 20,00,000 for 20 years at an interest rate of 10.5% per annum about 6 months ago. Now, after demonetization of Rs.500 and Rs.1000 notes, interest rates could get lowered by 1%-2% . So how this rate cut will impact Suresh, who is paying the EMIs of his home loan?

As you can clearly see the difference in EMIs and total outgo on home loan above in different scenarios. The rate cut, if comes into effect, can lower the EMIs of Suresh by Rs.1,325- 2,612.

Loan Affordability/Eligibility: With EMIs getting lower, the loan affordability rate will rise as more and more people can have a smooth repayment of the loan, which was earlier difficult for them.