The hidden cost of multiple EMIs

• Managing multiple EMIs can delay wealth creation via high interest.
• A debt-to-income ratio above 50% makes borrowers high-risk for lenders.
• Missing one payment can drop credit scores by 50 to 100 points.

Juggling a home loan, a car loan, and a couple of credit card EMIs has become a common reality. But beyond the monthly outflow, what is the true cost of managing multiple loans? The answer is often more than just the sum of the payments.

Beyond the Monthly Pinch

The most visible part of any loan is the Equated Monthly Instalment (EMI), a fixed payment that covers both the principal amount borrowed and the interest. When you have multiple EMIs, it's easy to focus only on the total amount being debited from your account each month. However, the real cost lies in the accumulated interest you pay over the tenure of each loan. With several loans running at once—each with its own interest rate and term—the portion of your income dedicated solely to servicing interest can become substantial, significantly delaying wealth creation and other financial goals.

The Impact on Your Debt-to-Income Ratio

Lenders use a key metric called the Debt-to-Income (DTI) or Fixed Obligation to Income Ratio (FOIR) to gauge your repayment capacity. This is the percentage of your gross monthly income that goes towards servicing existing debt. Financial experts advise keeping this ratio below 40-50%. For instance, if your monthly income is ₹80,000, your total EMIs should ideally not exceed ₹32,000. Each new loan pushes this ratio higher. Once your DTI crosses the 50% threshold, most lenders will see you as a high-risk borrower, making it difficult to secure new loans, even for emergencies.

The Unseen Damage to Your Credit Score

Managing multiple payment due dates increases the risk of accidentally missing an EMI. Even a single missed payment can be reported to credit bureaus, potentially dropping your credit score by 50-100 points. This not only incurs late payment fees and penalty interest but also damages your credit profile, making future borrowing more expensive. Furthermore, having several active loans, especially unsecured ones like personal loans and credit card EMIs, can increase your credit utilisation ratio, which may also negatively affect your score over time.

Beware of Hidden Charges

The total cost of a loan isn't just principal and interest. Each loan often comes with additional charges that can add up. These can include one-time processing fees (typically 0.5% to 4% of the loan amount), stamp duty, and legal charges. There are also potential prepayment penalties if you wish to close a loan early and loan cancellation fees if you change your mind after approval. When you are juggling multiple loans, these ancillary costs from each loan contribute to your overall financial burden.

Navigating the EMI Maze

If you find yourself overwhelmed, there are strategies to regain control. The first step is to list all your debts, noting the outstanding amount, interest rate, and tenure for each. Two popular repayment strategies are the 'avalanche' method, where you prioritise paying off the loan with the highest interest rate first, and the 'snowball' method, which focuses on clearing the smallest loan first for a psychological boost. For those with high-interest debts like credit card balances, consolidating them into a single personal loan at a lower interest rate can be a smart move. This simplifies payments to a single EMI and can reduce your overall interest outflow.