What is an EMI of a Custom Loan?
The fixed monthly payment which you make to the lender until your loan has been completely paid is known as an EMI (Equated Monthly Instalment) . Each EMI includes two parts:
Principal
The amount that lowers the principal loan.
Interest
The price that the lender will impose on the provision of finance.
Flexible Features
Confirm any specials that the custom loan can do, like bullet payments, the ability to pay EMI on different dates or even have an EMI holiday before signing.
Major Considerations that Influence Your custom Loan EMI.
Loan Amount
Increased principal corresponds to increased monthly payment which directly depend on EMI.
Interest Rate
A small percentage change in EMI and total interest paid has significant effects.
Loan Tenure
The longer the term taken the higher the cumulative interest paid and the reduced EMI.
Repayment Structure
Balloon payments, step-up EMIs, or fixed EMIs change the cash flow and allocation of interest.
Down Payment
A higher initial cost will reduce the principal and reduce the pressure of EMIs.
Credit Score
Those people possessing more profitable credit histories receive more advantageous conditions and lower rates.
Computation of Custom Loan EMI
The common formula used by lenders in EMI:
Practical Example
Maximize Your affordability Score & Loan
Your affordability score approximates your ability to repay EMIs. Typically, it considers monthly expenditure, savings, income and existing EMIs. It is possible to get the better terms and rates by improving these factors.
Raise Preliminary Contribution
Swings principal and EMI load initially
Choose Appropriate Tenure
Choose what you can afford. Shorter term will lower interest and increase EMI.
Compare Lenders
Compare processing rate and add-ons as well as annual percentage rates (APR) of all banks and NBFCs.
Improve Credit Score
To have a good rate, maintain a low utilization rate, clear up past due bills and ensure that payments are made punctually.
Consider Co-applicant
Joint income may lead to lower rates of interest and improved eligibility.
Affordability Guideline
Efforts should be made to maintain total EMIs ( sum of all loans) at less than 40 percent of net income. To be on the safe side, have a single custom loan EMI lying no more than 25-30 percent of monthly net income.
Prepayment: EMI/Tenure Reduction.
Prepaying is a form of payment of a part of the principal amount outstanding. Upon payment, you normally choose to:
Reduce EMI
Reduce Tenure
Important Prepayment Note
The prepayment, part-payment and foreclosure fees differ in each lender. Some lenders forfeit penalties after some period of time. In any case, the loan agreement contains exact terms.
Refinancing: When is It a Good Idea?
The refinancing (transferring your balance) to a lender with a lower effective rate can reduce EMIs and total interest.
Improved Credit
Your credit profile has been improved since you first got the credit and you are now getting lower rates.
Market Rates Drop
The deals with new lenders are better than yours, and the rates in the market have gone down.
Cost vs Savings
The long-run savings of administration and refinance cost are lower than expected.
Tax & Business Use Notes
Tax Treatment Varies
The taxation depends on both local law and the intended use of the loan. As a rule, personal-purpose custom loans are not subject to tax deductions. The deductibility of interest can be as an expense of business provided that the loan is to be used in making revenue or doing business.
Documentation Required
To get potential tax benefits, consult a tax advisor and maintain proper documentation of the use and purpose of the loan.
Common Mistakes to Avoid
Long Tenure Trap
When deciding to pay a very long tenure to trim down the EMIs, one ends up paying a very high overall interest.
Hidden Costs
Overlooking non-EMI costs which include add-on fees, insurance and fee processing.
Fine Print Oversight
Not going through the foreclosure and prepayment terms of the contract.
Dealer Finance
Accepting finance arranged by dealers that is not compared in relation to the market rates and conditions.
Frequently Asked Questions
You can request a partial prepayment (or even a restructuring which would reduce your EMI) depending on the policies of your lender. Refinancing at a lower rate on the other hand also reduces EMI. Confirm expenses, qualification and required documentation with your lender.
Not all the time. Long tenure normally leads to a very low EMI, which is adding up to the overall amount of interest paid. Balance between the cost and the monthly affordability to achieve a tenure and EMI that is flexible to achieve monthly cash flow and long term savings.
The rate will vary greatly, based on the lender, collateral, purpose of the loan and the borrower profile. Unsecured loans that are custom-made depending on credit risk may cost between 12 and 24 percent or more per annum; purpose-specific or secured loans have lower rates. The APR with fees and effective rates must never be left out.
In general, lenders would charge late, report delinquencies to credit bureaus, and initiate recovery actions (in case of prolonged default) on secured loans (this can lead to repossession). When things are not going on well, contact the lender immediately and discuss with him what to do to relieve you.
In the long-run, the reduction of outstanding balances and constant on-time payments tend to increase credit score. The use of installment debt reduces once the installment is paid off and enhances credit worthiness.
The Lender policy dictates the rate of prepayments. Once a lock-in period has elapsed, some lenders permit unlimited partial-prepayments; others charge or limit the frequency. Before you can make a number of prepayments, check the conditions of your loan.
You Are Ready to calculate your custom Loan EMI?
You can use our advanced EMI calculator to test, simulate prepayment, and export an amortization schedule which you can present to lenders.
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