What is an EMI for a Custom Loan?
An EMI (Equated Monthly Instalment) is the fixed monthly payment you make to the lender until your loan is fully repaid. Each EMI includes two parts:
Principal
The portion that reduces the original loan amount.
Interest
The cost charged by the lender for providing funding.
Flexible Features
Verify any features that the custom loan may offer, such as bullet repayments, flexible EMI dates, or EMI holiday options, before signing.
Key Factors Affecting Your Custom Loan EMI
Loan Amount
Higher principal translates into higher monthly payments, which are directly proportional to EMI.
Interest Rate
EMI and total interest paid are significantly impacted by a slight percentage change.
Loan Tenure
Over time, a longer tenure raises the total amount of interest paid while lowering the EMI.
Repayment Structure
Cash flow and interest allocation are altered by balloon payments, step-up EMIs, or fixed EMIs.
Down Payment
A larger upfront payment lowers the principal and eases the burden of EMIs.
Credit Score
More favorable terms and reduced rates are obtained by those with better credit profiles.
How to Calculate Custom Loan EMI
The standard EMI formula used by lenders:
Practical Example
Optimize Your Affordability Score & Loan
Your affordability score estimates how easily you can pay back EMIs. Usually, it takes into account monthly expenses, savings, income, and current EMIs. You can obtain better terms and rates by improving these factors.
Increase Upfront Contribution
Reduces principal and EMI burden from the start.
Choose Appropriate Tenure
Choose what you can afford. A shorter tenure reduces interest but raises EMI.
Compare Lenders
Examine processing costs, add-ons, and annual percentage rates (APR) for all banks and NBFCs.
Improve Credit Score
For better rates, keep utilization low, pay off past due amounts, and make sure payments are made on time.
Consider Co-applicant
Lower interest rates and better eligibility may result from joint income.
Affordability Guideline
Try to keep total EMIs (all loans combined) under 40% of net income. It is safer to limit a single custom loan EMI to 25–30% of monthly net income.
Prepayment: Reduce EMI or Tenure
Paying a portion of the outstanding principal ahead of time is known as prepayment. After payment, you typically decide to:
Reduce EMI
Benefits
- Keep tenure same
- Lower monthly instalment
- Improved cash flow
Considerations
- Higher total interest
- Longer debt period
Reduce Tenure
Benefits
- Keep EMI same
- Finish loan earlier
- Save more interest
Considerations
- No monthly relief
- Requires stable income
Important Prepayment Note
Prepayment, part-payment, and foreclosure fees vary from lender to lender. After a certain amount of time, some lenders waive penalties. For precise terms, always refer to the loan agreement.
Refinancing: When Does It Make Sense?
EMIs and total interest can be decreased by refinancing (transferring your balance) to a lender with a lower effective rate.
Improved Credit
Since origination, your credit profile has improved, making you eligible for lower rates.
Market Rates Drop
New lenders are offering better deals than your current rate, and market rates have decreased.
Cost vs Savings
Long-term savings from refinance fees and administrative expenses are less than anticipated.
Tax & Business Use Notes
Tax Treatment Varies
Local law and the loan's intended use determine the tax treatment. Generally speaking, tax deductions are not available for personal-purpose custom loans. Interest may be deductible as a business expense if the loan is used for revenue-generating or business purposes.
Documentation Required
For possible tax advantages, speak with a tax advisor and keep accurate records of the loan's use and purpose.
Common Mistakes to Avoid
Long Tenure Trap
Choosing a very long tenure just to reduce EMIs results in a significant increase in total interest.
Hidden Costs
Disregarding non-EMI expenses such as add-on fees, insurance, and processing fees.
Fine Print Oversight
Failing to review the foreclosure and prepayment provisions before signing the contract.
Dealer Finance
Taking dealer-arranged finance without comparing market rates and terms.
Frequently Asked Questions
Yes, you can ask for a partial prepayment or a restructuring to lower your EMI, depending on your lender's policies. On the other hand, EMI is also decreased by refinancing at a lower rate. Verify costs, eligibility, and necessary paperwork with your lender.
Not all the time. A long tenure typically results in a very low EMI, increasing the total amount of interest paid. Aim for a tenure and EMI that accommodate both monthly cash flow and long-term savings by striking a balance between monthly affordability and total cost.
Rates differ significantly depending on the lender, collateral, loan purpose, and borrower profile. Depending on credit risk, custom unsecured loans can range from 12% to 24%+ p.a.; secured or purpose-specific loans typically have lower rates. APR including fees and effective rates should always be compared.
Generally speaking, lenders impose late fees, notify credit bureaus of delinquencies, and may start recovery procedures in cases of extended default (secured loans may result in repossession). If you expect trouble, get in touch with the lender right away to talk about your options for relief.
Over time, lowering outstanding balances and continuously making on-time payments usually improve credit score. Repayment lowers installment debt utilization, which improves creditworthiness.
Lender policy determines the frequency of prepayments. After a lock-in period, some lenders allow unlimited part-prepayments; others impose fees or restrict the frequency. Prior to making several prepayments, review the terms of your loan.
Ready to Calculate Your Custom Loan EMI?
To test scenarios, simulate prepayment, and export an amortization schedule that you can provide to lenders, use our sophisticated EMI calculator.
Open EMI Calculator