EMIs are probably one of the most substantial outflows from our monthly income and it is always a good idea to try and decrease the burden! But first, what exactly is an EMI? EMI stands for Equated Monthly Installment. It is a fixed amount you have to pay to your bank/lender on a fixed date, every month, for the entire tenure of your loan period, until you have fully repaid the loan with the interest due. The loan could be for any purpose – housing, auto, gold or personal loan.
What does the EMI amount consist of?
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.
Here are some ways in which you can reduce your EMI payments:
1.Higher down payment: When your loan is sanctioned, choose to make a large down payment so that the principal amount is reduced. Your interest payment is calculated on the principal, so the smaller the principal, the lower the interest payment and smaller EMI. It might seem difficult to come up with a large down payment, but it will be worth it in the long run and result in significant savings in EMI payments. This is especially the case with long-tenure loans like a housing loan which involves EMI payments over decades.
2.Opt for a longer tenure: If you have 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 EMIs 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: One way to significantly reduce your EMI for the majority of your tenure is to make an early pre-payment. If you are able to afford the option of prepaying part of your loan, it is better to do it in the early months/years of the tenure so that your principal decreases, thereby saving you interest on later payments.
4.Negotiate with the bank: If you are in good standing with your lender and have been disciplined about making your repayments on time, then you could ask your lender for a reduction in the interest rate. If you have demonstrated good repayment behaviour, your lender might be willing to lower the interest rate, thereby reducing your EMI burden.
5.Transfer you loan to another lender: If you find a lender who offers better terms and conditions on your loan, it might be a good option to change your lender. However, it is important to calculate the costs involved in prepaying your loan with your existing lender and to ensure that the costs are not greater than the savings you will gain with your new lender.