How to reduce your EMI
Equated Monthly Instalment or EMI is a major part of your monthly expenses If you have any existing Loan.
Over time they seem to be a burden and especially when you have taken a long-term loan like a home loan which lasts for a good period of 20-30 years.
Also, it takes off around 30 to 40% of your monthly income and it seems you are trapped into it forever.
Here are some tips on how one can reduce their EMI over a period.
Tenure of your Loan – Opt for Longer Tenure to reduce EMI
If the tenure of your loan is more, then you tend to pay lower monthly installments as the loan amount get disbursed over that much period.
However, you tend to pay interest as well for a longer period and hence your interest amount paid to the bank or financial institute become more.
Say you have taken an amount of thirty lakhs from the bank over a period of ten years at an interest rate of 8.5%, then you tend to pay an EMI of around INR 37,000 for every month for the next ten years.
And if this tenure is increased to 30 years this EMI amount reduces to around INR 23,000.
However, in the former scenario, you were paying an interest amount of 14.5 Lakhs and in the later, you are paying an interest amount of 52 lakhs.
So, this is how the tenure of your loan can impact your EMI and the interest payment.
Ask for extra payment options from your bank
Ask if you could make extra payments for your loan amount whenever excess funds are available with you.
The interest is almost every time charged on the remaining principal amount.
Hence if you pay extra amount even once every year, you tend to reduce the principal amount by that much for the next year and hence your EMI will also reduce accordingly.
Open a mortgage account with your funding bank
If you can have a mortgage account with your bank, then the interest will be charged on only the amount that is not in that account.
To explain this, if you have a mortgage account with your funding bank and you have deposited INR 5 lakhs into that account and your total loan amount is INR 30 lakhs, then your bank will charge you interest only on remaining INR 25 lakhs.
This way you EMI also tend to go down over time if you could maintain that amount into your mortgage account.
Increase the frequency of your re-payments
If you can pay every week or every fortnight in place of every month, this also tends to reduce your loan tenure and the applicable interest rates as you are paying off your loan amount earlier and with every payment your applicable interest rate also reduces.
This also tends to make the loan cheaper over time as you tend to pay a lower amount in interest for your loan amount.
Find cheaper options – to reduce you EMI
You can either re-negotiate your interest rates with your lending bank or you can opt for getting your loan re-financed at lower rates.
Often banks, float schemes to lure new customers and you can then ask your lending bank to give you as well these new reduced rates to help your payoff your amount easily and at lower EMIs.
Also, sometimes if you have opted for fixed interest rates however over time the RBI has reduced the interest rates charged on home loans, then you can ask your bank to give a competent interest rate as per applicable guidelines of the RBI.
It is always possible to get your loan re-financed at lower interest rates from an alternative financial institute.
Long term loans which range over 20 or 30 years, it’s often possible that many of the scenarios change over time and there may be different fiscal policies floated by the RBI and government to support the demand of loans in that period.
So, you can often take a wise decision and get your loan re-financed at lower rates as applicable over time.
opt for Step Down Loan
Step down loans often reduce the applicable interest rates as your principal amount reduces over time.
This way when you pay regular installments, you tend to reduce your EMI with every moving period.
This is often beneficial to people who are close to their retirement and are not competent to get any other source of income over time.
opt for early payments
One can opt for early full or partial payments of their loans.
However, you must ask for this option from your lender while you are opting for a loan.
Sometime, this may come with hefty charges of pre-payments and pre-closure of the loan amount. With pre-payments, you tend to pay your principal amount and hence your EMI for the rest of the loan amount becomes less as your principal amount reduces.
Prioritize your loan payments
Based on the monthly expenses you must prioritize your various loans for payment.Loans on credit cards are the most expensive and hence should be paid out as soon as possible. Then comes your personal loans and home loans.
The overall intention is to reduce the interest amount.
Which can be either reduced by paying off lower interest rates or reducing the principal amount on which you must pay the interest amount.
All the options explained above are revolving around this logic only. If you could think of any other option around this, please let us know in the comment section below.