# Floating interest rate

My bank increased my interest rate by 25 basis points (0.25%) should I be concerned?

Like the case of my friend (screenshot below), the banks have a tendency to increase the interest rate and often without any warning or prior communication.

Does 0.25% matter?

Well I ran a small calculation using an EMI calculator:

If I borrow 25L for 20 years today at 10.25%, I am expected to shell out Rs 24,541/- every month.

However, if the bank increases the interest rate by 25 basis points and I continue to pay the same interest rate, then I need to pay an additional 15 EMI to repay the loan. (no wonder the banks offer to extend your loan duration). Check for yourself in excel =PMT(10.25%/12,12*20 years, 25Lakhs)

15 EMI means 15months of additional debt, and Rs. 3.63L additional as EMI/interest on a Rs 25L loan. That is a whopping 14.52% extra burden!!!!!

What is even worse, fixed interest rate is not fixed, bank will change it to floating after 3 years.  Also they can say that your risk profile has changed (very common with students) and change the interest rate. Everybody knows what floating means, but I am yet to meet someone whose interest rate went down.

Repost from my original article at Samuhik