loans make it easier for individuals to buy a home of their own or an expensive luxury car of their choice by making repayments in equated monthly installments (EMIs). the flexibility to pay in EMIs helps you buy things that require significantly large financial assistance without taking a hit on your monthly income and expenditure budget. this is the main reason why many people opt for EMI payments.
getting a loan is a significant financial commitment, hence, you should be highly calculative about the amount involved and the time taken to repay the loan. there are a lot of points to be considered before applying for a loan, let's explore them below.
the banks and NBFCs offer different types of loans and EMI payment options to attract customers. the loan market is highly competitive, hence, the loan EMIs can vary from lender to lender depending upon a lot of factors. the three main factors that affect the loan EMI payments are - principal amount, rate of interest, and tenure of the loan.
how does loan tenure affect your EMI payments?
the loan tenure depends upon the type of loan you are taking. typically, the loan tenure of a personal loan or a vehicle, or an education loan can vary between 3 to 5 years, whereas a home loan tenure lasts up to 10-25 years. the longer the loan tenure, the lower the EMI payment but the higher interest. if you lower the loan tenure, your interest amount will reduce but the equated monthly installment will increase which can put severe pressure on your monthly budget if you have financial constraints. hence, while taking a loan, you need to fix your monthly EMI payments taking into consideration your job security or a sufficient source of funding for the entire loan period. this will keep you away from any kind of financial burden during the loan repayment tenure. the most important point to consider while planning for a loan is the total EMI amount. the CRED offers a free online loan EMI calculator that will help you estimate the total EMI amount applicable for your loan.
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how does the loan interest rate affect your EMI payments?
the rate of interest of the loan is one of the most important factors that impact the EMI payment of your loan. the loan interest rate varies from lender to lender, and can significantly affect the EMI amount. hence, while planning your loan EMI, compare the interest rates of various banks to calculate how much principal amount and interest you would be paying. while comparing the loan interest rate of different banks, you should keep the loan tenure fixed and also consider other important factors such as type of interest, processing fees, foreclosure fee, etc.
types of loan interest rate
there are two types of loan interest rates - fixed interest rate loans, and floating interest rate loans. when it comes to the fixed interest rate loans, the EMI payments remain the same for the entire duration of the loan tenure. in the case of a floating interest rate loan, the EMI payment amount may increase/decrease depending on the current market interest rate. a floating interest rate may go up or down if there's any policy change directed by the Reserve Bank of India (RBI). hence, if the rate of interest changes, your EMI amount may also change.
if your current lender increases the interest rate significantly, you can choose to transfer your loan to another lender to lower your EMI payments. this process is known as 'loan balance transfer'. the main reason for loan transfer is to lower the EMI payment, hence you should weigh all the factors pertaining to your EMI amount. when you transfer your loan from one lender to another, certain costs are involved, for example, file charge, foreclosure fee, balance transfer charge, etc. all these factors will help you make sure that in an effort to reduce your EMI payments, you do not end up paying more on overall loan amount due to higher transfer charges.
prepayment or part payment of the loan
the options you choose to repay your loan significantly affect the EMI. if you want to reduce the EMI burden from your monthly expenses, you can prepay or make part payment towards your loan. when you repay a large part of your loan amount before the decided tenure, it will significantly reduce your principal loan amount to be paid and, in turn, reduce the EMI payment amount. however, certain lenders charge a prepayment or foreclosure penalty which can range between 1 to 5 percent of the outstanding principal amount. there might also be some other charges involved with the foreclosure of the loan which you should check with your lender before taking the loan. it is advised that you should always read the loan agreement carefully to make an informed decision.
as you are now aware that there are a lot of factors that affect EMI payments, you should carefully weigh all the pros and cons of the above-mentioned parameters before taking a loan. a little planning and research in the initial stage could significantly impact your loan EMI amount. you can take the help of the CRED EMI calculator to estimate your loan EMI amount by considering the three main factors - principal amount, interest rate, and tenure - that impact the EMI amount.