High EMI on any loan, whether personal or home-related, can put a burden on finances. You can lessen your EMI burden without hampering your financial stability, though, if you practice prudent financial planning. Loan repayments can drastically cut your monthly income, making it difficult to pay other expenditures.
Here are five effective strategies to lower your EMI and save money.
1. Choose Right Loan Size & Tenure
One of the most common mistakes borrowers make is they often take out more loans than needed.. This results in higher EMIs and unnecessary interest payments. Assess your financial needs and ask for only what is necessary; the loan tenure affects your EMI.
The loan tenure is crucial in determining your EMI.
A longer tenure reduces your EMI but increases the total interest paid over time.
A shorter tenure increases your EMI but helps you save on interest costs.
If you can afford higher EMIs, opting for a shorter tenure is a smart choice. However, if managing a large EMI is difficult, a longer tenure will ease the monthly burden.
Example:
Assuming you have taken a loan of ₹10 lakh for an interest rate of 10% for a period of 5 years, the EMI will amount to ₹21,247. For a 10-year term, the EMIs reduce further to ₹13,215, but total interest will increase.
Pros & Cons:
Pros: Lower EMIs with longer tenure; interest savings with shorter tenure
Cons: Longer tenure means higher interest costs; shorter tenure means higher monthly payments
2. Make Prepayments Whenever Possible
Prepayments help in reducing the principal amount of your loan, which directly lowers your EMIs and total interest payments. Any bonus or income such as tax refunds should be categorized as sources of extra cash and considered for partial prepayments rather than expenditure elsewhere.
Every bank or lender enables prepayment for their customers. However, some banks charge a prepayment penalty. So, check with your lender before prepayment.
How Prepayment Works:
Let’s assume you got a 15-year home loan of ₹20 lakh at 8% interest, with an EMI of ₹19,147. Now, you pay a lump sum prepayment of ₹2 lakh after 3 years, then the adjusted EMI will be around ₹17,380, or you can keep the same EMI but shorten the loan tenure.
Pros & Cons:
Pros: Faster loan repayment, reduced interest payments
Cons: Some lenders charge prepayment fees
3. When to Consider Refinancing?
If you are now eligible for better loan offers since your credit score has increased
If the interest rate you currently pay your lender is more than what the market will bear,
To better fit your financial situation, you can modify the loan’s duration.
Make sure the savings outweigh the costs before choosing a balance transfer, though, as refinancing has processing fees and verification requirements.
Example:
If you have a ₹30 lakh home loan at an interest rate of 9%, and another lender offers 7.5%, refinancing could save you thousands of rupees in interest and reduce your EMI.
Pros & Cons:
Pros: Lower EMI, reduced interest burden
Cons: Refinancing fees, documentation process
4. Increase Your EMI Amount Over Time
One intelligent method to lessen your tenure on loans and save on interests is to increase the amount of EMI whenever your financial position improves. Whenever you get a raise in salary, profit from business, or add-on income, direct it toward increasing the EMI amount. Little increases in EMIs can lower the tenor as well as total interest payable on a loan.
Example:
Let’s say your EMI is ₹20,000, and after a salary increase, you raise it to ₹22,000. This additional ₹2,000 can shorten your loan tenure by a few years and save you a significant amount of interest.
Pros & Cons:
Pros: Faster repayment, reduced interest cost
Cons: Requires consistent financial stability, needs proper planning
5. Consolidate Multiple Loans into One
Getting All Your Loans into One
If you have a variety of loans, a personal loan, credit card debt, and an automobile loan, you may be paying different interest rates and managing several EMIs. Debt consolidation entails taking one personal loan at a relatively lower interest rate to pay off all existing loans.
By consolidating your debts, you can:
Lower your overall EMI burden
Simplify your repayments with a single EMI instead of multiple payments
Get better repayment terms and a lower interest rate
Example:
If you have:
Credit Card Debt: ₹1 lakh at 36% interest
Personal Loan: ₹3 lakh at 14% interest
Car Loan: ₹4 lakh at 12% interest
You can take a single personal loan of ₹8 lakh at 10% interest and pay off all these debts, reducing your total EMI.
Pros & Cons:
Pros:
- Lower EMIs, better financial management.
- Simplified loan management
- Potential savings on interest
Cons: Requires a good credit score, may involve processing fees
Final Thoughts
Managing your EMI payments smartly can help ease financial stress and save money. Here’s a quick recap of the top strategies:
Choose the Right Loan Amount & Tenure: Borrow only what’s necessary and pick a suitable tenure.
Make Prepayments: Use bonuses and surplus income to reduce your principal amount.
Refinance for Lower Interest Rates: Transfer your loan to a lower interest lender when possible.
Increase EMIs Over Time: Raise your EMI when your financial situation improves to repay faster.
Consolidate Debts: Merge multiple loans into one to lower EMIs and simplify repayment.
Know your financial condition before applying for loans; research various loan types and make repayment plans. An action plan will minimize the EMI burden and keep you from future financial messes.
Act Now and Make Your Loan Repayments Stress-Free!