Blog Article 2022 (2)

How does floating interest on your Home Loan impact your finances?

Your home loan EMI is determined by 2 things - the rate of interest and the tenure of your home loan. Of these 2 factors, the interest rate is determined by the RBI and Banks, tenure is what you can adjust based on your home cost and your EMI affordability.

The first thing to know is that your Home loan interest rate is a floating Interest rate i.e. the interest rate on your home loans would increase and decrease depending on the repo rates set by the GOI. If the interest rate goes down, it will benefit you because you will be paying out a lesser amount of interest. On the other hand, if the interest goes up, then you pay more interest.

In the past 8 years, the interest rate has been on the downward trend making home buying a very lucrative deal for us as the home loan kept getting cheaper. However, in the past 6 months, the interest rate has been raised twice by the RBI. The RBI is increasing the interest rate to curb the rise in inflation. You can read more about it here. 

See the Interest Rate chart here to know the movement of the Interest rate by the GOI.

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How would increase in interest rate affect a home-buyer’s payout?

The Reserve Bank of India (RBI) raised its key repo rate by 50 bps to 4.9% during its June meeting, after May's surprise 40 bps off-cycle hike, surprising markets had forecast a 40 bps rate hike

Many Investors, who bought houses at the interest rate of 6.75% - 6.95% (at their lowest), will now have a big impact on their EMI. Their Home loan interest rate would increase by at least 1% in the coming months. In fact, if there is a further increase from RBI, your home loan interest rate could also go up to 8%. The interest rate determines your EMI, so where there is an increase in interest rate, your EMI would increase. Many banks are offering that instead of EMI, increase your tenure of the home loan (which sounds more doable as it will not impact the home-buyers cash flows). 

In the example below, we shall explain to you what you should opt for with the increased interest rates.

Increase your EMIs - keeping tenure the same.
Increase your tenure - keeping EMIs the same.

An example: 

House Loan - INR 1 crore

Interest Rate - 7%

Tenure - 25 years

EMI - 70,678

Total Interest payout - 1,12,03,335

Total Payout  - INR 2,12,03,335


How your EMI will be affected by an increase in interest rate by 1%

table 1 (3)

In this table, you can observe that with an increase in interest rate, the EMI is also increasing and hence, the total interest payout over your home loan tenure has also increased.

Banks these days instead of raising your EMI will increase the tenure of your loan. Let's understand how that would impact your overall interest payout.

How your increase in tenure can impact your loan payout?

However, many banks are not increasing their EMIs, but increasing the tenure on the home loans. Let's see how that would impact your total cash outflow over the home loan period. 

table 2 (1)

You can observe from the above tables that the total interest payout when you keep the EMI the same is much more than the option of increasing your EMIs.

table 3 (1) (1)

You can learn more about buying a house from our course - Money & Makaan - 

Change in interest rate is not something you can control but is determined by RBI and the banks. The best approach is to be prepared for an increased rate and keep some cash flow free so you are able to afford the rise in EMIs.

Wealth Cafe Advice: 

Remember when the increase in interest rates is beneficial to your banker, they will not call you and tell you how the tenure increase instead of EMI increase is better for them than for you. 

The best approach for you would be to understand the difference between the 2 approaches and their impact on your cash flow. Connect with your banker and ask them to share a calculation, loan amortisation sheet, and understand your numbers. You can reach out to us at iplan@wealthcafe.in to know more about it.  

How to Apply for a Loan on PPF

Small Savings Schemes is one of the best options that help you in times of crisis. 

One such Small Savings Scheme is Public Provident Fund (PPF), which other than being a long-term savings option, also allows you to take a loan in case of an emergency. 

PPF accounts allow the subscribers to take personal loans against the available balance in the account at a competitive interest rate. This is beneficial for individuals who want to apply for short-term loans without pledging any asset as collateral. The interest rate offered on the loan is also very competitive.


  • All subscribers of PPF are eligible for taking such loans.
  • If the account is in the name of the minor, in that case, the guardian may apply for the loan on their behalf.
  • The principal loan amount must be repaid first and then the interest, to be paid in two installments or lesser.
  • It must be noted that once the interest rate is set for a loan, there is no change in the interest rate until the duration of the loan ends
  • In case the borrower repays the principal amount within the specific loan tenure but not the accrued interest, the outstanding amount will be deducted from his PPF account.
  • From the 7th financial year onwards, account holders can partially withdraw from the PPF account.

Case study on taking a loan against PPF account
Let us consider a scenario wherein Mr. A opened a PPF account in January 2010:

Financial year 1: April 2009 – March 2010 (Account opened within this timeframe – in January 2010)
Financial year 2: April 2010 – March 2011
Financial year 3: April 2011 – March 2012 (Can take a loan starting in this year)
Financial year 4: April 2012 – March 2013
Financial year 5: April 2013 – March 2014
Financial year 6: April 2014 – March 2015 (Can take a loan only up to this year, as next year will qualify for partial withdrawals)
Financial year 7: April 2015 – April 2016 (Mr. A can begin withdrawing from his/her PPF account from this date)


When can you take a loan against a PPF account?
You must have a Public Provident Fund account in a bank in order to be eligible to apply for a loan against PPF. You can take a loan against PPF between the third year onwards and the end of the sixth financial year from the date of opening your PPF account. After this period, you are eligible to withdraw partially from your PPF account.

How much can you withdraw?
From your PPF account, the maximum amount that you can withdraw or avail as a personal loan is 25% of the total amount in your PPF account. The PPF balance considered for this is the one that is accumulated by the closing of the second financial year prior to the year the loan was applied for.

What will be the interest charged on the loan?
Interest is charged at 1% more than the interest earned on the balance in the PPF account. Therefore, when there is an update in the interest rate of PPF account, the interest rate on the loan will also see a proportional change. But once the interest rate is set for a loan, this rate will be applicable till the end of the tenure.

How many loans can be taken?

You can take only one loan in a Financial Year. It is not possible to avail as a second loan on the PPF account until the first one has been paid off completely.

What will be the tenure of the loan?
The tenure on loan against the public provident fund is fixed at 36 months. The tenure will be calculated from the very first day of the month following the one in which the loan against PPF was sanctioned. If the loan is repaid within 36 months of the loan taken, the loan interest rate @ 1 percent per annum shall be applicable. And if the loan is repaid after 36 months of the loan, the loan interest rate @ 6 percent per annum shall be applicable from the date of loan disbursement.

Advantages of taking a loan against PPF account

Availing of a loan against your PPF account can be advantageous in many ways. Here are some of the key benefits of doing so:

No collateral or mortgage required - You will not be required to pledge any asset in the form of collateral when taking a loan against your PPF account.
Repayment tenure of 36 months - The loan can be repaid within 36 months. This timeline is calculated from the first day of the month following the month in which the loan is sanctioned. For instance, if the loan was sanctioned on 25th January 2018, then the loan tenure of 36 months starts from the 1st of February, 2018.

Low-interest rates - This is one of the most significant benefits of availing a loan against your PPF account. Interest rates are far lower than those of traditional personal loans from banks.
Flexibility in repayment - The repayment of the principal amount of the loan can be done either in two or more installments (on a monthly basis) or as a lump sum


PPF is a long-term investment that most people do for their comfortable retirement. Therefore, it would not be a smart move to liquidate your long-term investments to cater to short-term cash requirements. Since PPF provides tax-free and risk-free returns which beat inflation and hence one must look at other alternatives for their financial needs. However, if you do not have any other option you may go for it as the rate of interest is considerably lower.

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An Education Loan Guide Book

Quality education comes with a hefty price tag. In today’s education arena, competition is stiff and it is often the ones with the heavily lined wallets that beat out the rest. Fearing losing out on a seat in a premier institute because of lack of funds, parents try their best to gather and keep aside as much funds as possible; but despite their best efforts, they may tend to fall short. During this time education loan comes to one's rescue, as it helps to bridge the gap between the shortfall and the needed money.

What is an Education Loan?

The term education loan refers to the sum of money borrowed to finance school or college-related expenses. Repayment of the loan is generally deferred when the students are studying in school and a six-month grace period is provided post-graduation.

Types of Education Loan in India

In India, the types of Education Loan are broadly classified as Undergraduate Education Loan Graduate Education Loan Career Education Loan

1.      Undergraduate Education Loan: It is a loan which can be availed by students who have completed their secondary education and are planning to pursue further courses to enhance their skills for securing a job.

2.      Graduate Education Loan: These loans can be availed by students who are planning to pursue an advanced degree or higher education at colleges. To apply for this loan, students should have completed theirs under graduation courses.

3.      Career Education Loan: As the name suggests, the career education loan can be availed by students who prefer to attend undergraduate career-oriented programmes provided at technical and trading schools and colleges (like ITI) in the country.

How Does An Education Loan Work?

An education loan helps students to cover the expenses incurred for their academic fee and it also covers their non - academic expenses which occur during their tenure as students. The provision of a student loan unlike any other kind of loan comes in with a set of payment terms and the interest will be charged over the initially borrowed money. An education loan is also known as Student Loan. The EMIs for student loans should be paid over monthly installments which allows the applicants to repay the loan amount through step - by - step procedure.

Eligibility for an Education Loan

·         The applicant should be a resident Indian.

·         The applicant should be aged between 16 - 35 years.

·         The applicant should have either secured admission in any of the designated educational institution or a college which is approved by the bank. Most of the government and some of the top private ones are being recognized by the relevant competent government body and are usually included in the list of approved institutions for an education loan.

Please Note: The education loan covers the complete school fees until the completion of the course and is disbursed to the institution directly from the bank (the money will not be handed over to the students). Any kind of boarding and lodging expenses incurred by the students (includes relocation to a different city for studies) should also be included in the education loan.


List of Expenses included in Education Loan

A student loan covers almost all kinds of academic expenses incurred by a student. Almost all the banks in India provide loans that cover both tuition fees as well as other institutional expenses. It is better if students can check beforehand if their chosen bank or the financial institution will cover all the expenses or not to avoid inconvenience at a later point in time.

Academic Expenses Covered in an education loan

·         Registration Fee

·         Tuition Fee

·         Capitation Fee

·         Examination Fee

·         Counselling Fee

·         Laboratory Fee

·         Hostel Fee

·         Library Fee

·         Transportation Fee

·         Food (Mess) Fee

·         Study Visits and Education Tour Fee

Non - Academic Expenses Covered in an education loan

·         Building Fee

·         Student Insurance Refundable Caution Money

·         Transport and Commuting Expenses

·         Laptop

·         2 - wheeler Equipment and Project Expenses Student Welfare Contribution

·         Entrance Exam Fee (GMAT, TOEFL, LSATS, MCAT, GRE, SAT Exam and so on)

·         In-Flight Expenses (abroad studies)


List of Things to Keep in Mind Before Applying for an Education Loan

Opt your Institute Carefully

Most of the Indian banks and financial institutions will have a list of accredited universities list and they usually restrict themselves to lend loans to the universities or colleges which are listed with them. They also have a few blacklisted universities for which applications will be rejected. If in case, your chosen institute is not on the list of the bank's pre-approved universities then it is better to look out for banks or other institutions that will provide education loans based on the reputation of the institute.

Such banks take note of certain factors like rating, job placement facility, infrastructure into consideration before approving education loans. Students who are planning to study in India can apply for universities that are recognized by the government, University Grants Commission (UGC), Institute for Mediation and Conflict Resolution (IMCR), All India Council for Technical Education (AICTE), and so on. Those who are planning to study abroad should look for the university's reputation and standing.

Maximum Amount for Education Loan

For higher education in India, one can secure a loan of up to Rs 75 lakh with a maximum repayment tenure of up to 15 years. If you are looking for abroad education, then the maximum loan amount available for students is Rs 1.5 crore with a maximum 15 years repayment period.

Interest and Processing Cost

The interest rate for education loans in India stands between 8.50% - 15.20%. Some of the banks provide interest rates at discounted rates if you pay interest on time. Few banks even provide a concession for women applicants at a rate of 0.5 percent. One should also check for the processing fee which is refundable at times based on the bank from where you are procuring the loan amount. Some of the lenders fix processing fees between 1% - 2% of the entire loan amount. In the case of public and private banks, the processing fee ranges between Rs 5,000 - Rs 10,000. Please Note: One may have to incur additional charges like administration fees and service charges during the loan application process.

Decide on the Marginal Amount

Marginal amount refers to the amount which one needs to pay and it ranges between 5% - 15% based on several factors such as the rating of the institute, location, subject. Bank usually funds 80% - 90% of the total required amount for education the remaining part has to be pitched in by you (or parents) from your saved funds. Some of the banks and financial institutions even offer to foot the entire cost based on the student's academic background and performance over the years.

Collateral And Co-Applicants

As per the RBI norms, if your loan amount is less than Rs 4 lakh, then you need not pledge any collateral nor you will have to arrange for anyone as a third-party guarantee or as a co-applicant. If your loan amount exceeds Rs 4 lakhs, then you may be asked by your bank to arrange for a co-applicant. Banks will seek collateral if the loan amount exceeds Rs 7.5 lakhs.

Repayment Holiday

In the case of a student loan, banks usually give a moratorium period (time frame wherein you have availed a loan but has not started for repayment) and hence it is better if you can plan and pay interest during this tenure as interest will accumulate on a simple interest basis during this period. If you start paying your equated monthly installments (EMIs) during the moratorium period, then you can prevent the loan amount from becoming bigger.


Each year, millions of college hopefuls flood into Indian banks to get financial support for their college careers. It can seem daunting, with dozens of forms from multiple institutions, but knowing where to start and what to ask can make a world of difference.


Should You Prepay Your Loans?

Hello fellow investors


Every person who takes a loan faces the question of whether they should prepay the loan or invest the surplus.
You take a loan at an EMI you can afford. Eventually, your income increases and you find that can pay back more of the loan than you had originally planned. So what should you do? Prepay your loan or invest the surplus?

The answer to this question depends upon 2 things:

A. How much interest are you paying on your outstanding loan? 

B. How many returns would you earn by investing that money?

If the trade-off is positive enough then you continue with your loan and invest and if not – you prepay your loan. Pretty simple right? I shall break this up for you based on the type of loan you have and what kind of investments you are comfortable to make.

Credit Cards & Personal Loans: 
These are the most expensive loans ever! In fact, the cost of borrowing i.e. the interest you pay on your credit card varies from 2% - 4% per month i.e. 24% to 48% per annum. The interest on your personal loans is also usually 14% - 18% which is also pretty high.

The only way you can earn a return higher than these loans is by taking an extreme risk with your investments which include the risk of losing your capital. It makes no financial sense in not paying your card bills and using that money to make investment gains. 

Given choice, prepay your credit card and personal loans with your extra savings.

Education Loans and Home Loans: 
Education loans are attractive for their tax deductions. Home loans are the cheapest and the longest loan that you will ever own and hence, there is always a question of whether to prepay your home loan or not.  

To help you decide, you should do the below three checks.


Check I

One way to check this is how comfortable you are with your home loan. If the home loan EMI is at 50% of your take-home income – you should consider pre-paying your Home loan and reducing the EMI to at least 20%-30% of your take-home income. If it is already a 20%-30% of your home loan EMI, you can consider continuing with the home loan.

Next, you need to consider the returns of your current investment opportunities i.e. what is the after-tax return of available investments opportunities versus the interest burden on your home loan. 

Let us understand this with numbers:


Cost of home loan: Home loans EMI are at an interest cost of about 8.00% per annum. If you fall under the 20% tax bracket, the home loan cost is reduced to 6.40% after assuming you are able to claim the entire interest as a deduction in your Income Tax Return. If you come under the 30% tax bracket, the cost of your loan falls to 5.60% because of the tax-saving you get.

Check II 
Return on Investments: It will make sense not to prepay the loan if the returns you will earn from investing today are higher than your cost of 6.40% or 5.60%, 

How much you earn from your investments would depend upon in which asset class, you invest your savings:

1) Fixed deposits – The interest rate on Fixed Deposits today range from 5.00% to 6.00%. Some of the Corporate deposits are yielding returns in the range of 7%. The post-tax returns will be lower by 20%/30% depending on your tax bracket. 

If you are risk-averse and generally park your money in fixed deposits and other safe and low-return instruments, then you are certainly better off using your surplus earnings to reduce the home loan.

2) Equities - The returns on equity investment average about 12-15% over 10-15 years. So investing your surplus into Equities is numerically more beneficial than prepaying the loan.

Check III 

But before you make the decision to invest the surplus in Equity Mutual Funds/Equity Stocks, you must check if you have the risk tolerance for dealing with the ups and downs of the equity market. You should choose to if you are planning to stay invested for 7-10 years because equity investments give better risk-adjusted returns over the long term only. 

Also, by investing the surplus into Equities, your target Debt Equity ratio determined by your Asset Allocation should not get skewed towards Equities.

In conclusion, the decision to prepay the loan or not depends on your existing financial situation, the extra earnings from investments, and your risk-taking capacity as an individual.

Do ensure that you have your emergency fund in place and some investments at your disposal before you go ahead and prepay the loan with all the money at hand.  

See you next Thursday!

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

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