Introduction to EMI
In life, there are phases when people realize that their savings are not enough to meet an urgent requirement. While borrowing from friends and relatives is fine for smaller amounts, people usually approach financial institutions seeking loans for bigger amounts.
Getting a loan sanctioned is a big deal as it not only gives you the capital to fulfill your need , it is also seen as a seal of approval on your ability to repay it. However, the long and difficult process of repayment introduces you to the Equated Monthly Installments (EMI) that are supposed to make the process easy.
An EMI is a fixed amount that should be paid back to the lender on or before the monthly deadline to avoid penalties. A part of it pays off the principal amount and the rest pays the interest. Proper management of budget is required to pay the EMIs on time.
How does it work?
As said earlier, EMIs pay off a bit of the principal amount and monthly interest. The borrower ideally opts for a rate of interest that suits his budget. EMIs get bigger if the amount borrowed is big or tenure of the loan is smaller.
As opposed to variable payment plans, where the borrower can pay higher payment amounts at his discretion, in EMIs, there is only one fixed payment amount allowed each month.
EMIs can be easily calculated using online tools or can be devised by mathematical formulas. At the initial phase, EMIs are directed towards the interest payments and are diverted at paying principal repayments only towards the end of the tenure. EMIs are usually fixed unless someone opts for refinancing to avail better rate of interest, or does a prepayment or opts for step-up or step-down options.
Why to opt for an EMI option?
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Helps to buy expensive utilities
From buying a home to car to funding a foreign trip or education, or for scaling up business, EMIs increase the affordability quotient of the consumers, which their current savings do not allow. One can fulfill both immediate needs and longtime desires with the convenience of EMIs.
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Better management of expenses
One can easily plan and pay smaller amounts by opting for EMIs. The borrower knows that a particular amount has to be paid as EMI every month and thus, he/she will manage their other expenditures accordingly.
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Easy on wallet
Making a huge lump sum amount at one go can send the annual budget for a toss. However, paying a relatively smaller amount is much easier for the borrower.
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Flexibility
Lenders give borrowers the option of deciding the amount of EMIs and the duration, whichever the latter may find comfortable vis-à-vis their current earnings and expenses.
Tips to better manage your EMI
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Asses your EMI before applying for loan
Use mortgage calculators to calculate your loan repayment capabilities. They help you understand how much capital you should borrow by assessing what sum of money you can comfortably pay every month. Ideally, EMIs should not put additional pressure on your strained financial situation.
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Manage your funds
Maximize your cash flows, which means, simply increase your income and decrease your expenses. Close certain investments that are not giving good returns and invest the capital on something more profitable or use them to pay off loans. Try to go on a money-saving spree for a few months and get the loan monkey off your back.
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Research all options before applying
It is imperative to find the right lender. EMIs will change according to tenure, the rate of interest, and the loan amount and thus, locating lenders that offer better schemes will bring EMIs considerably down.
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Maintain a good credit score
A good credit score helps you in getting a better deal on your loan amount and EMI payment from lenders. So, it is advisable to pay your outstanding credit card bills and other loans to up your credit score before applying for the loan.
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Use Lump sums to Prepay
If lenders are not levying any fines on prepayment, additional income like an increment in salary or a fixed deposit getting matured should be used for prepaying the loan. The lump sum amounts can reduce the tenure of the loan and try to make these payments in the initial phase of the loan when the principal amount is high to maximize your savings.
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Pay an extra EMI each year
Lenders usually do not levy any charges on smaller prepayments like an extra EMI each year. Make use of such benefits and the one extra EMI per year can save you a lot of money in the long term.
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Don’t delay or miss your EMI
Not paying EMIs on time can lead to a double whammy. It will invite penalties as well as hamper your credit score. Keep a contingency fund ready to tackle unforeseen expenses, but do not treat defaulting on EMIs as an option. You can also opt for auto-debit from your bank account.
EMIs have many benefits, but it is a tedious task to pay them month after month without delay for years. One has to be both diligent and meticulous to not miss out on any single EMI. However, with proper management of your budget and a sharp eye on better offers in the market, one will be able to pay off the loan with utmost convenience.
