Simple Ways to Reduce Your Loan EMI

As individuals living in times of ever increasing inflation, it isn’t always easy to accumulate savings. Everyday, prices of necessities are going up, forcing us to spend more on our day to day living. Groceries, transport, education, etc. are no longer available at the same price which they were perhaps 3 years ago. In addition to our day to day expenses, there are certain major expenses or investments which one must make in order to secure their financial future or even bring some comfort in their life.

For example, an individual wishes to purchase a house which can yield them some income by way of rent or they would want to purchase a vehicle in order to make their commute easier and comfortable. For such major expenses, it is always advisable to take a loan, instead of making the purchase with the help of one's savings.

A loan may be taken in order to fulfill any life goal or finance an immediate need. However, one must remember that a loan is also an added expense, considering the interest which banks levy on the EMI payable. A higher rate of interest can make repaying your home loan that much costlier. With a higher rate of interest, the amount of EMI which you have to pay automatically goes up.

There are certain ways or tips which can help you save money on your loan EMI. From negotiating with your lending company to changing your lender, listed below are some of the ways in which you can bring down the cost of your loan.

Opt for a Higher Down Payment

Down payment is the amount the customer pays upfront at the time of purchase of the respective item. Since a part of the total price of the item is borne by the customer, the amount that the customer will have to borrow as loan will also come down. 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. Therefore, it is a wise decision to pay a large amount as down payment. This will not only help you reduce the EMI of your loan, but will also help you save big in the long run.

Choose a Loan With a Longer Repayment Tenure

The term of loan repayment is inversely proportional to the amount of EMI for a particular loan amount. When you opt for a long loan tenure, the total due amount is distributed over a longer span of time. This, in turn, reduces the payable amount as monthly installments. However, choosing for a longer term also means that you will be charged a rate of interest on the outstanding debt for an extended duration. While increasing the loan tenure can decrease your EMI, it can translate to a larger amount of interest over the course of the loan tenure. 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.

Go for a Step-Down EMI Plan

There are numerous banks and non-banking financing companies that provide their customers with the option of a Step-Down EMI Plan. According to this scheme, when a borrower avails a loan, he or she has to pay a larger amount as EMI during the start of the tenure. As time progresses, the EMI amount gradually decreases as the principal amount decreases after each monthly payment. This plan can help reduce the interest burden during the later part of the loan tenure. Therefore, this kind of flexi-EMI scheme is best suited for people who are closer to their retirement as it is based on the cash flow needs of the customer.

Consider Taking Loans With Your Existing Bank

If you’re already a customer with a certain bank, it would be a wise option to consider the same bank for purchasing a loan. This could work in your favor if you have a good standing with your bank, in which case they may be very likely to provide you with a lower rate of interest on your preferred loan.

Negotiate With Bank For Lower Rate

Considering the above point, where the individual has a good standing with their bank, they may be in a position to negotiate with the bank for a lower rate of interest on the loan. Banks may be willing to do so for their existing customers in order to increase brand loyalty and also attract more customers.  

Compare Before You Switch Your Lender

If you have decided to take a loan and your existing bank is not offering the best deal, feel free to look around. There is no shortage of credible and established loan providers in the market. However, before you zero in on a particular company, make sure that you have read the details of the loan like the prepayment penalty (if any), loan processing fee and other such charges which can contribute to the overall cost of the loan, making it more expensive. Also, if you are switching, do take note of the charges that your current lender may be levying for the transfer of the loan.

Full or Part Prepayment Helps Reduce Loan Burden

Loan prepayment can go a long way in helping you reduce the cost of your loan. In case you have received raise or have come into some money, it is highly advisable to partly or fully prepay your loan. As we know, a higher outstanding loan amount will attract a higher rate of interest. Therefore, while full prepayment helps you get rid of the loan burden completely, part pre-payment can also help greatly by bringing down not only the principal amount of the loan but also the term of the loan, resulting in lower payable interest.You can use EMI Calculator to calculate your EMI on Loan repayment.

Prioritize Payment of Loans With The Highest Interest

There are some loans which attract significantly high rates of interest, like credit card loans. Therefore, if you have taken a credit card loan, a personal loan and a home loan, it is advisable to pay off the credit card loan as soon as possible. While paying off the credit card loan, you may pay the minimum amount towards the repayment of your other two loans. By repaying the loan with the highest interest first, you can greatly save on the high rate of  interest which you’d otherwise have to continue paying, had the loan remained unpaid for that long a duration.

Take a Balance Transfer Loan

A balance transfer loan can help you reduce your loan EMI since such loans are offered with lower interest rates. However, it is also important to take into account other factors such as processing fees and other charges to make sure that it is indeed worth transferring your loan to another bank.

FAQ's

1. How much down-payment should I pay to reduce my loan EMI?

There is no limit to how much down-payment you can pay as the higher the down-payment, the lower will be your loan obligation and the lower will be your EMI. Since banks usually offer between 85% to 90% of the value of the product or property you intend to buy, you typically have to pay between 10% to 15% of the price as down-payment.

2. What are the factors that determine the EMI of a loan?

Your loan EMI is determined by a number of factors. The main factors are the interest rate and the tenure of the loan. Other factors will be the quantum of loan and the amount of down-payment that you have made on the loan.

3. Which kind of interest rate gives a lower EMI – floating rate of interest or fixed rate of interest?

Floating interest rates are typically lower than fixed interest rates, so the EMIs for loans with a floating interest rate will be lower than for a fixed rate of interest, but would also depend on the tenure you choose as well as the quantum of loan required.