Why smaller tenures with higher EMIs are better
The dreaded three-letter word, encapsulates the story of this generation, as it were. EMI (Equated monthly instalments) for house or car loans, is ubiquitous amongst middle class and upper middle class households. And yet, most individuals have merely a broad understanding of what EMI is all about. Likewise, the common complaint which rings true for any individual is how EMIs are eating into their incomes. Many individuals would like to have more cash in hand. It, therefore, logically follows that many would be tempted to opt for a lower EMI and a higher tenure. However, experts suggest otherwise.
Higher EMI= huge interest savings
According to experts, it is better to reduce one’s loan tenure and pay higher EMI, calculate easily with an EMI Calculator tool and thereby save on interest. For instance, if a takes a loan of Rs 50 lakh with a 20 year tenure at 11% interest, A would be paying an EMI of over Rs. 51, 000. If the loan rate is reduced to around 10%, the EMI would reduce to around Rs. 50,000. However, if a can pay an EMI of around Rs. 52,000 at the outset, he or she can lower the tenure by two years and as a result, save around Rs. 8 lakh interest.
Banks and rate hikes
The longer the tenure of the loan amount, the costlier the loans get. Banks, therefore, prefer to increase the tenure of the loan by a few months or years following rate hikes rather than increase the EMIs. Also, several banks fear that raising EMIs also raise the possibility of Non Performing Assets (NPA) which will have a direct impact on their margins. Experts, therefore, suggest that even after tax deductions, a huge loan will, more often than not, adversely affect one’s financial status owing to unpredictable interest rate movements.
Interest rates and loan tenures
Loans with longer tenures are typically offered with higher interest rates (owing to more risk) but lower EMI while loans with shorter tenures are offered with lower interest rates but higher EMI (the loan amount and the interest have to be paid over a shorter tenure). Personal loan EMIs calculate easily with Personal Loan EMI Calculator.
Pre-payment option
In a rising interest rate scenario, pre-payment of loans is the best option. Depositors should try to repay a part of the loan to reduce their EMI (According to RBI notification released in 2012, banks are not permitted to charge loan prepayment rates for home loans).
Short term vs long term impact
A higher EMI can pinch the pocket of consumers in the short term. However, in the long term, consumers can save lakhs of rupees. For instance, home loan applicants, by and large, fall in the age bracket of 35 to 45 years. If the tenure of the loan is 25 years, consumers will have to pay the loan during their retirement years in several cases. With no regular income, paying an EMI may prove to be a tall task owing to the added burden of rising inflation. Also, most consumers will have to bear several expenses during advancing years such as their children’s college education and weddings.
Higher EMI= huge interest savings
According to experts, it is better to reduce one’s loan tenure and pay higher EMI, calculate easily with an EMI Calculator tool and thereby save on interest. For instance, if a takes a loan of Rs 50 lakh with a 20 year tenure at 11% interest, A would be paying an EMI of over Rs. 51, 000. If the loan rate is reduced to around 10%, the EMI would reduce to around Rs. 50,000. However, if a can pay an EMI of around Rs. 52,000 at the outset, he or she can lower the tenure by two years and as a result, save around Rs. 8 lakh interest.
Banks and rate hikes
The longer the tenure of the loan amount, the costlier the loans get. Banks, therefore, prefer to increase the tenure of the loan by a few months or years following rate hikes rather than increase the EMIs. Also, several banks fear that raising EMIs also raise the possibility of Non Performing Assets (NPA) which will have a direct impact on their margins. Experts, therefore, suggest that even after tax deductions, a huge loan will, more often than not, adversely affect one’s financial status owing to unpredictable interest rate movements.
Interest rates and loan tenures
Loans with longer tenures are typically offered with higher interest rates (owing to more risk) but lower EMI while loans with shorter tenures are offered with lower interest rates but higher EMI (the loan amount and the interest have to be paid over a shorter tenure). Personal loan EMIs calculate easily with Personal Loan EMI Calculator.
Pre-payment option
In a rising interest rate scenario, pre-payment of loans is the best option. Depositors should try to repay a part of the loan to reduce their EMI (According to RBI notification released in 2012, banks are not permitted to charge loan prepayment rates for home loans).
Short term vs long term impact
A higher EMI can pinch the pocket of consumers in the short term. However, in the long term, consumers can save lakhs of rupees. For instance, home loan applicants, by and large, fall in the age bracket of 35 to 45 years. If the tenure of the loan is 25 years, consumers will have to pay the loan during their retirement years in several cases. With no regular income, paying an EMI may prove to be a tall task owing to the added burden of rising inflation. Also, most consumers will have to bear several expenses during advancing years such as their children’s college education and weddings.