All You Want To Know About Your EMIs

The COVID-19 pandemic has not only posed a big question mark on health and well-being, but it has also affected our economy in never-before ways. Therefore, it does not come as a surprise that both individuals and businesses are trying to survive this crisis by taking loans to fund emergency needs and keep the cash flow positive. However, availing a loan without focusing on the EMI can be the perfect recipe for a financial disaster. After all, unless you pay back EMIs punctually and steadily, your credit score might be affected.

Hence, find out how EMIs are calculated, what benefits they offer and how you can manage them wisely during these challenging times.
 

How does EMI work?

Every loan works on the basic principle of monthly interest payments till the loan is repaid. It is no different for EMIs as every deduction pays off a certain principal and interest amount. The EMI depends upon the loan amount, the interest charged and the loan duration.

In the initial stage of EMI payments, the component of interest amount is higher than the principal. But as the EMIs continue, the principal component becomes larger and the interest component becomes smaller. The amount of repayment is equal every month, so only one fixed amount of payment is allowed to be paid normally.

The amount of EMI can be easily calculated using an online EMI calculator. Based on your needs as well as the ability to pay, you can modify the loan duration to know how much EMI would have to be paid in each case and then make a decision.

Also Read: Tips To Effectively Manage Your EMI
 

Advantages of EMI

• Affordability

  Through EMIs, you can afford high-value items like cars, which would otherwise require a long time to save up.
   

• Convenience

  Immediate needs can be fulfilled with convenient EMIs, which can be paid from your salary account. This makes the EMIs a good option for managing expenses.
   

• Easy on the wallet

  Rather than spending a huge amount from your savings in one go, it is easier to pay off smaller and regular amounts from the monthly salary received, which makes it easier on your wallet.
   

• Flexibility

  You can choose the EMI amount based on the loan duration, to suit your needs. This makes it a comfortable and flexible option to meet requirements.  

What are No-cost EMIs?

Nowadays, many user-friendly schemes of no-cost EMIs are provided to customers, which help in reducing the burden of paying a huge amount upfront. The interest cost is discounted in such schemes. But usually, a processing fee is involved, so, you must read all terms and conditions carefully before opting for such loans.

Also Read: Missed Your Last Few EMIs? Here Is What to Do Next
 

Using EMI Moratorium

One of the most important aspects that you need to keep in mind while opting for a loan is to never miss an EMI. It is considered a breach of faith and affects your credit score negatively. During the peak of the pandemic, when timely repayment of EMI was difficult, the RBI extended a helping hand with the EMI moratorium facility. The meaning of moratorium period in personal loan refers to a temporary pause allowed on EMIs without affecting the borrower’s credit history. Under this, a borrower could choose to not pay their EMI till August 31, 2020. However, the moratorium doesn’t imply that the interest for the three months is foregone. It was only an option to defer their loan payments until August, without worrying about your credit score.

Also Read: Understand Your EMI: Equated Monthly Installment
 

How to Manage your EMIs better?

Many people deal with more than one loan at a time, be it a home loan, car loan, personal loan etc. Managing EMIs of all the loans together may get a little tricky though. Therefore, here are some pointers on how to manage these well.
 

• Diligent research

  Planning for EMIs begins long before you apply for a loan. You can find countless financial institutions in the market. But choosing the best among them is important. And for that, you will need to devote sufficient time to researching your options. Compare the qualifying requirements of multiple lenders to see who best suits your profile. Remember, interest rates and other components are determined by how well you match the lender's qualifying criteria.

• Calculate your EMI beforehand

  While applying for a loan, carefully evaluate all options and calculate EMIs in each scenario to gauge which one will suit you best in terms of least interest payment and best affordability. You may take a help of a loan EMI calculator for this.
   

• Forecast your cash flows carefully

  Use scenario analysis to carefully forecast your cash flows and avoid any pressure in the future regarding timely payments of your EMIs.
   

• Prepayments of high-interest loans

  There are times when you may have extra cash in hand. Use the same to prepay your high-interest loans in case the lender is not charging a prepayment fee. Repayment of the principal amount in the initial years can lower the interest burden.
   

• Use windfall gains

  The best way to manage your EMI while also saving on interest payments is to use windfall profits. Windfall gains refer to sudden and unexpected income from different sources such as lottery winnings, profits from stock market trading, and more.
   

• Avoid unnecessary expenses

  Make a list of all of your monthly expenses and cross off any that are truly unneeded. You may avoid eating food in restaurants daily, cut down on your lavish shopping habits, and limit your weekend outings to unexplored nearby sites. Saving on these minor things will allow you to better manage your EMI.
   

• Use your investment wisely

  If you have received any payouts from your previous investments, use them wisely. If you don't intend to utilise the investment funds soon, you can use them to pay off a large portion of your loan EMI and save money on interest. Furthermore, if you have earned any kind of appraisal or bonus at work, you might set aside a portion of it for debt repayment.
   

• Never miss an EMI

  Maintain your credit score and avoid unnecessary penalties by paying your EMIs on time. To manage this better, maintain a contingency fund in case your cash inflows get stuck in unexpected places.
   

Benefits of Paying EMI on Time

If you stick to the lender's EMI process, you can enjoy various benefits. 
 

• By paying your loan EMIs on time, you can save yourself from paying unnecessary penalties. The penalty is calculated based on a percentage of the EMI that was skipped.

• Paying your EMIs on time improves your credit score and history. Since it provides the appearance to the lender that you are a creditworthy borrower, applying for a loan becomes much easier in the future. There is also a chance the lender will grant you a loan with favourable terms.

• Making timely EMI payments will qualify you for a top-up loan if you have applied for a used car loan or a home loan.

Concluding thoughts

EMIs are a good way to manage large expenses, but they come at a cost. One has to be diligent and careful to never miss an EMI payment. The longer the duration of a loan, the smaller the EMI, but the larger is the interest cost that you have to bear. However, with meticulous planning and proper budgeting, one can pay off the loan regularly and conveniently through EMIs.
 

Disclaimer:  This post was first published on 3 July 2020 and has been updated for the latest information, freshness and accuracy.