How to Reduce your loan EMI

How to Reduce your loan EMI

With the increase in population, the prices of necessities are also growing up, forcing an individual to spend more every day. The Prices of transport, groceries, education, etc. are no longer same, they change yearly. Not only day to day expenses, there are certain major expenses or investments that one wants to consider in order to secure financial future or even bring some comfort in life. For example, purchasing a car, house or other luxury items. For such major expenses, it is always recommended to take a loan, instead of making the purchase with the help of one’s savings.

A loan can fulfill any life goal or finance an urgent requirement. However, one must keep in mind that a loan is also an added expense, considering the interest which banks levy on the EMI payable. With a higher rate of interest, the amount of EMI, which you have to pay automatically increases.

What exactly is an EMI?

EMI stands for Equated Monthly Installment is a fixed amount you have to pay to your lender on a given date, every month, for the entire time period of the loan, until you have fully done repayment of your loan with the interest due. Each EMI consists of payment towards the principal, or actual amount borrowed and the interest on that amount for the entire loan period. EMI’s are probably one of the massive outflows from our monthly income and it is always a good idea to decrease the burden.

Here are some of the ways that can help you save money on your loan EMI and can bring down the cost of your loan:

1. Opt for a Higher down payment:

Down payment is the amount the customer pays upfront at the time of taking a loan. The interest of a loan is calculated based on the principal amount borrowed by the customer. Therefore, the higher the loan amount, the more money you will have to pay as interest and the higher your EMI amount will be. it is always a wise decision to pay a large amount as down payment. 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. Choose a Longer Repayment Tenure:

When you opt for a long loan tenure,  your EMI reduces proportionately as your principal and interest are divided over a longer span of time. However, while the monthly installments 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. Therefore, you should be very careful before extending your loan tenure and always weigh all the pros and cons before increasing the duration of the loan.

3. Making an early prepayment:

As we all know that a higher outstanding loan amount will attract a higher rate of interest. One way to significantly reduce your EMI is to make an early pre-payment. Loan prepayment can reduce the cost of your loan. If you are able to afford partly or fully prepaying your loan, then it is good for you to do it in the early months of the tenure so that your principal amount decreases, thus saving you interest on later payments.

4. Negotiate With Bank For Lower Rate:

If you are in good standing with your bank and have been disciplined about making your repayments on time, then you could ask your bank for a reduction in the interest rate. If you have shown good repayment behavior, your bank might be willing to lower the interest rate, thereby reducing your EMI burden. Banks may be willing to do so for their existing customers in order to attract more customers and also increase brand loyalty.

5. Compare Before You Switch Your Lender:

If you have decided to take a loan and your existing lender is not offering the best deal, you can look for other lenders. There is no shortage of established loan providers in the market. 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 (prepayment penalty) involved in prepaying your loan with your existing lender and to ensure that the costs(loan processing) are not greater than the savings you will gain with your new lender.