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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Debt Management and Loans

Caselet: Meera has an outstanding home loan of Rs 40,00,000 at a floating rate of 9% p.a. with an EMI of Rs 36,000. Her bank's external benchmark linked rate falls so that her rate is reduced to 8% p.a. If she keeps the EMI unchanged, what is the most likely effect?

The loan tenure will shorten. When the interest rate falls but the EMI stays the same, a larger share of each instalment repays principal, so the outstanding balance reduces faster and the loan is cleared earlier than originally scheduled.

  1. AThe loan tenure will shortenCorrect
  2. BThe loan tenure will lengthen
  3. CThe outstanding principal will rise
  4. DThe EMI will automatically double

Explanation

With a lower interest rate and an unchanged EMI, a greater part of each payment goes toward principal, so the loan is repaid sooner. The principal does not rise since EMI exceeds the monthly interest. Therefore tenure shortens.

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