With our banking system giving loans and other benefits to its customers, the dream of owning a car or a home is no distant reality now. The loans are easily repaid in the form of Equated Monthly Installment (EMI) that gets deducted from the monthly salary of the borrower. The deduction takes place on a fixed date of every month until the loan + interest is repaid.
Each EMI consists of payment towards the principal (actual amount borrowed) and the interest on that amount for the entire loan period. In the early years, a higher proportion of the EMI is formed by the interest payment on the principal. As the loan matures, the interest component decreases and the principal amount forms a higher percentage of the monthly payment.
Our finances needs a lot of careful consideration and we need to deal with the EMI’s very smartly. Apart from managing the monthly expenses and EMI, we also need to save for the future. Here are some ways in which you can reduce your EMI payments:
1) Plan to pay more down payment: If you plan to buy a home, choose to make a large down payment for the property so that the principal amount is less. The interest payment is decided on the basis of principal amount, so it is always advisable to pay more as down payment and ease out on the burden of monthly installments. The smaller the principal, the lower the interest payment and smaller the EMI.
2) Go for longer tenure: If you go for a long loan period, your EMI reduces proportionately as your principal and interest is divided over a greater number of months. However, while the actual monthly outflow will be smaller, you will be paying out EMI’s for a longer period and paying interest for a longer period. So while your monthly burden might be smaller, you might end up paying more over the entire duration of the loan.
3) Making an early prepayment: The most feasible way to reduce your EMI is to make an early pre-payment. The early pre-payment of the loan will hit the principal amount and lower the EMI’s significantly. If the part payment is made in the early months/years, it decreases the principal amount and saves the interest on later payment.
4) Refinance the loan: If you think your bank is charging more interest rate, consider changing your bank. A borrower has the freedom to approach another bank that offers lower interest rate to refinance the loan. But the difference should be enough to switch from one financial institution to another to ensure that the costs are not greater than the savings you will gain with your new lender.