Introduction: The Face Value vs. Real Value of Money
Imagine you have taken a loan with a fixed monthly installment (EMI) of ₹30,000 to be paid over 30 years. At face value, this means you will pay ₹30,000 every month without change, totaling ₹1.08 crore (₹30,000 × 12 months × 30 years). That sounds like a massive financial burden, right?
However, this perspective ignores a crucial economic factor: inflation. Inflation is the rate at which the general level of prices for goods and services rises, causing the purchasing power of money to fall over time. Simply put, ₹30,000 today will not buy the same amount of goods and services 10, 20, or 30 years from now.
To truly understand the burden of your loan payments, you need to look beyond the nominal amounts and consider the real value of your installments — that is, their value adjusted for inflation.
How Inflation Affects the Real Value of Your EMI
Let’s take a 10% annual inflation rate as an example, which is not uncommon in many emerging economies historically. This means that on average, prices increase by 10% every year.
To find the real value of your ₹30,000 monthly installment in future years, you discount it by the inflation rate. The formula for the present value (PV) of a future payment considering inflation is:
PV = Future Payment ÷ (1 + inflation rate)number of years
Applying this formula, your ₹30,000 payment in future years is worth less and less in today's rupees.
Year-wise Real Value of ₹30,000 EMI at 10% Inflation
| Year | Nominal EMI (₹) | Real Value of EMI (₹) | Percentage of Original Value |
|---|---|---|---|
| 1 | 30,000 | 27,273 | 90.91% |
| 5 | 30,000 | 18,627 | 62.09% |
| 10 | 30,000 | 11,574 | 38.58% |
| 15 | 30,000 | 7,193 | 23.98% |
| 20 | 30,000 | 4,464 | 14.88% |
| 25 | 30,000 | 2,774 | 9.25% |
| 30 | 30,000 | 1,722 | 5.74% |
Note: The real value is calculated as ₹30,000 ÷ (1.10)year. For example, for year 10: ₹30,000 ÷ (1.10)10 ≈ ₹11,574.
Visualizing the Decline in Real EMI Value
Below is a simple graph illustrating the decline in the real value of your ₹30,000 monthly installment over 30 years at 10% inflation:
The graph above shows how the real burden of your ₹30,000 EMI steadily decreases over 30 years, thanks to inflation.
Why Does This Matter? The Psychological and Financial Impact
Many borrowers feel overwhelmed by the size of their EMIs when they first start paying. ₹30,000 every month sounds like a lot, especially if your income is limited or stagnant. But as inflation increases the cost of living, your real EMI burden decreases, often without you noticing.
This means that while your EMI remains fixed in nominal terms, its impact on your disposable income and lifestyle gradually eases. If your income grows at or above the inflation rate (which is often the case in growing economies), servicing your loan becomes easier over time.
This dynamic is a key reason why long-term loans, such as home loans, are considered manageable even if the initial EMI seems high. It also highlights the importance of factoring inflation into your financial planning.
Real-World Example: Home Loan EMI vs. Inflation
Let’s consider a practical example. Suppose you take a home loan with a ₹30,000 monthly EMI at an interest rate of 8% for 30 years. Assume inflation averages 10% annually, and your income grows at 10% per year as well.
- Year 1: Your EMI is ₹30,000, and your monthly income is ₹1,00,000. The EMI is 30% of your income.
- Year 10: Your EMI is still ₹30,000, but your income has grown to about ₹2,59,000 (₹1,00,000 × 1.109). The EMI is now only about 11.6% of your income.
- Year 20: Your income is approximately ₹6,73,000, making the EMI just 4.5% of your income.
- Year 30: Your income is about ₹17,48,000, and the EMI is a mere 1.7% of your income.
This example shows how the fixed EMI becomes easier to manage as your income grows and inflation erodes the real value of money.
Comparing Total Nominal Payments vs. Present Value
While you pay a total of ₹1.08 crore over 30 years (₹30,000 × 360 months), the present value of these payments is much less due to inflation. Let’s calculate the present value (PV) of all these payments considering 10% inflation.
The PV of an annuity (fixed payments over time) discounted at inflation rate i is:
PV = P × [1 - (1 + i)-n] / i
Where:
P = monthly payment (₹30,000)
i = monthly inflation rate = (1 + 10%)1/12 - 1 ≈ 0.00797 (0.797%)
n = total number of months = 360
Plugging in the numbers:
PV = 30,000 × [1 - (1.00797)-360] / 0.00797
Calculating (1.00797)-360 ≈ 0.0499
PV = 30,000 × (1 - 0.0499) / 0.00797 = 30,000 × 0.9501 / 0.00797 ≈ 30,000 × 119.2 = ₹35,76,000 (approx)
So, while you pay ₹1.08 crore in nominal terms, the present value of all those payments combined is only about ₹35.76 lakh in today's money.
Why Understanding This Can Change Your Financial Decisions
This insight is critical when deciding whether to take a loan or break your fixed deposits (FDs) or other investments to pay upfront. Many people break their FDs to avoid loans, fearing the burden of EMIs. But if inflation is high and your income grows, the real burden of EMIs will decline, while your investments continue to compound.
In many cases, it might be financially wiser to keep your investments intact and service the loan, especially if your investments yield returns higher than the loan interest rate.
For example, if your FD yields 7% interest and your loan interest is 8%, factoring in inflation and compounding, holding the FD while paying the loan EMI can be more beneficial than breaking the FD to pay upfront.
Scenario Analysis: Breaking FD vs. Taking Loan
Consider the following simplified scenario:
| Scenario | Loan Interest Rate | FD Interest Rate | Inflation Rate | Outcome |
|---|---|---|---|---|
| Break FD and pay upfront | N/A | 7% | 10% | Lose potential FD interest earnings; no loan cost. |
| Take loan at 8%, keep FD at 7% | 8% | 7% | 10% | Loan EMI burden reduces in real terms; FD continues compounding; better wealth retention. |
| Take loan at 12%, keep FD at 7% | 12% | 7% | 10% | Higher loan cost might outweigh FD gains; breaking FD may be considered. |
Key Takeaways for Borrowers
- Inflation reduces the real value of fixed EMIs over time. Your ₹30,000 payment today is worth much less in 10, 20, or 30 years.
- Income growth often outpaces inflation. As your income rises, the EMI becomes a smaller portion of your earnings.
- Breaking investments to avoid loans can be costly. You lose out on compounding returns and may be worse off financially.
- Loans for appreciating assets (like homes) are often beneficial. The asset value and inflation can work in your favor.
- Use calculators and tools to model your specific situation. Every financial decision should be data-driven, not emotional.
How the LoanVsFD App Can Help You
Our LoanVsFD App is designed to help you visualize and understand the real value of your EMIs, investments, and loans over time. By inputting your loan amount, interest rate, tenure, and expected inflation and income growth rates, you can see how your financial burden evolves.
The app also compares your loan cost with potential investment returns, helping you decide whether to break your fixed deposits or take a loan.
Download the LoanVsFD App today and take control of your financial future with clarity and confidence.
Conclusion
Paying ₹30,000 every month for 30 years might seem daunting, but when you factor in inflation and income growth, the real burden of that payment is significantly less than it appears. Understanding the real value of money over time is crucial for making smart financial decisions.
Don’t let the nominal EMI amount scare you into breaking your investments unnecessarily. Instead, use data, logic, and tools like the LoanVsFD App to make informed choices that maximize your wealth and minimize unnecessary financial stress.
Disclaimer
The information provided in this article is for educational and informational purposes only and should not be construed as financial advice. Inflation rates, interest rates, and income growth vary over time and across individuals. The examples and calculations are based on assumptions that may not apply to your specific situation. Always consult with a certified financial advisor or professional before making significant financial decisions. LoanVsFD.com and its affiliates disclaim any liability for losses or damages arising from the use of this content or any related tools.
