Unsecured loans that include personal loans are commonly borrowed to meet several particularly large one-time costs, weddings, medical crises, debt consolidation, and travel. The interest rates and the qualifications of these loans are also not the same as the ones of secured loans (home or auto loans) since they are unsecured (they do not have collateral). The basics of EMI personal loans such as the computation of EMI, reduction of interest, balance transfer system, prepayment strategies, documents and other terms and conditions that you need to look at before signing are discussed in this guide.
What is a Personal Loan EMI?
An EMI (Equated Monthly Instalment) is the standard sum that you pay to the lender on a monthly basis until your personal loan is repaid. Each EMI consists of principal repayment and interest charges. Unsecured personal loans therefore generally bear greater EMIs than secured ones of the same principal and tenure due to the increased interest rate.
EMI Components
Your EMI consists of two parts: Principal (the actual loan amount) and Interest (the cost of borrowing). Early EMIs are typically a bigger portion of unsecured personal loans since interest rates are higher on personal loans.
The Major Characteristics of personal loans
Unsecured
Collateral-free loans are also processed faster and in most instances they have higher interest rates than secured loans.
Flexible Use
Money can be used in almost any legitimate need without considering the end-use restrictions.
Shorter Tenure
The average term is one to five years although there are a few lenders who are willing to give up to seven years on bigger platforms.
Quick Disbursal
A large number of lenders can provide same-day disbursal or a few-day disbursal with minimal paperwork, provided the applicant is qualified.
Key Factors Affecting Your Personal Loan EMI
Loan Amount
The higher the principal amount, the higher the EMI amount.
Interest Rate
The rates of a personal loan that usually are between 10 and 24 vary widely based on the lender and the credit profile.
Loan Tenure
The long tenure reduces the EMIs but increases the overall interest paid during the life of the loan.
Credit Score
Borrowers who are above 750 in their credit scores have higher chances of receiving low-interest rates charged by lenders.
Additional Costs
Processing charges and extras: These are start-up expenses that can be added to the loans, which basically increase the cost of the amount financed. To make a valid comparison of costs, one should always consider the Annual Percentage Rate (APR).
Calculation of EMI in Personal Loan
The general EMI formula employed by lenders:
Practical Example
Important Note
Lenders are charged varying interest rates and effective costs (processing fee, insurance, GST on fees) on personal loans. When comparing things, it is always important to look at the effective rate or Annual Percentage Rate (APR)
Eligibility & Documentation
Your income, whether you are employed or not, credit, age and the employment stability all influences your eligibility.
Income Requirements
The minimum monthly income is also different by lenders and cities; in the case of metros, it is 15,000 25,000.
Employment Stability
Most lenders will require 6-12 years of tenure with the current employer and 1-2 years of overall work experience.
Credit Score
To get the lowest rates, have a credit score of 750 and above. Some lenders have minimum requirements (650 +).
Age Criteria
Salaried people normally have 2160 years at the maturity date of the loan and the self-employed people have 2165 years.
Required Documents
Identity Proof
Aadhaar, passport, voter ID, PAN card, driving license
Address Proof
Utility bills, Aadhaar, passport, rental agreement
Income Proof
Salaried: salary slips (last 3 months), self-employed: bank statements/ITR.
Employment Proof
Letter of new employee-employer regarding the new job
Pre-Approved Offers
Depending on historical dealings and connections, certain lending companies offer pre-qualified personal loans to existing customers with minimal paper work.
How to maximize EMI and minimize Interest Cost
Improve Credit Score
In order to qualify to have reduced rates, you must have your bills paid on time, keep your credit usage at a low level and also have your outstanding balance paid in full.
Compare Multiple Offers
Compare APR (including processing fees and add-ons) of multiple lender quotes.
Choose Optimal Tenure
Select a tenure that you can comfortably pay, the longer the tenure the less the interest but the higher the EMI.
Avoid Fee Roll-over
Any processing costs are paid in advance instead of being subtracted off the balance of the loan.
Prepayment & Foreclosure Strategies
Principal balances are reduced by prepayment. There are various options and charges of each lender.
Part-Prepayment
Advantages
- Make a lump sum reduction to principal
- Liberty to demand reduced EMI or reduced tenure
- Gives out interest with time
Considerations
- May be frequency/amount limited
- Other lenders impose processing fees
- Policy on the check lender of rules
Foreclosure
Advantages
- Make full payment of outstanding balance
- Close loan completely
- Applicable in case of change of lenders or settlement of debts
Considerations
- A great number of lenders charge foreclosures
- Particularly typical of unsecured loans
- Carefully read loan agreement
Decision Rule
Foreclose to recoup interest where you have a spare amount of money and the cost of pre-paying or foreclosure is low or there are no fees at all. Partial principal reductions being made at the early stages often generate higher returns in situations where charges are high.
Balance Transfer (Refinancing)
A balance transfer is transferring your existing loan balance to another lender with lower interest rates.
When to Consider Balance Transfer
You should consider transferring your balance when your credit score has increased greatly since you borrowed the loan, or the savings you will receive due to the reduced rate exceed the transfer fees and the cost of processing, or when the cost savings of the reduced rate save you more money than the transfer charges.
Balance Transfer Process
Check Current Outstanding
Get the latest loan statement filled with the principal and the amount of the foreclosure expenses due.
Compare New Offers
Explore low-interest lenders and determine how much can be saved.
Calculate Net Savings
Calculate the net present value by taking into consideration the processing fees, transfer fees, and any other cost.
Complete Transfer
Go ahead and complete balance transfer application in case of positive net savings.
Tax Considerations
Personal Use
Tax Treatment
- Interest is normally not tax deductible
- No principal repayment tax breaks
- The amount of loan is not taxable
Business Use
Potential Deductions
- Interest can be as a deductible business expense
- Income tax conditions and rules are subject to tax
- See tax professional regarding details
Important Note
Interest on personal loans which are used at a personal level is not tax deductible. In the business or income-generating case, according to tax rules, the interest charged on a personal loan borrowed to start a business or to earn interest is potentially deductible as a business expense; it depends on the jurisdiction, seek advice with a tax expert.
Top Personal Loan mistakes to avoid.
Long Tenure Trap
Choosing the longest term just to minimize EMI (this enormously dilates total interest).
Ignoring True Cost
Disregarding GST, insurance and processing fees, which may increase the price of offer.
Overlooking Fine Print
Not looking into the foreclosure and prepayment terms contained in the contract.
Over-borrowing
Borrowing more money than you really need; do not take more than you really need.
First Offer Bias
Dismissing the comparison shopping options and depending only on the first pre-approved offer.
Multiple Applications
In case you apply with multiple lenders at the same time, your credit score could also be damaged.
Missing Payments
Late and missed EMIs lead to penalties and damaged credit score.
Rollover Debt
Using new personal loans to pay off past loans without altering the expenditure patterns.
Frequently Asked Questions
The rates vary considerably with the profile of the borrower and the lender. Unsecured personal loans are charged at a range of about 10% to 24% p.a., depending on the credit worthiness of the borrower and the market. Always compare the offers and research the effective annual percentage rate of the lender.
The interest charged on the personal loans is not usually deductible. Under tax laws, the interest can be deductible provided that it is expended on business or in generating taxable revenue; consult a tax counsel.
A better credit score helps you generally to get reduced interest rates, hence cutting down on EMI with a given tenure and amount. Clients who are already on the books might sometimes get pre-approved deals by the lenders depending on the relationship and the previous dealings.
Yes, but charges could be charged before the closure/foreclosure, which can vary according to the lender and the loan contract. Enquire of any fees that may be imposed in case of pre-closing, and compare the saving to the expenses.
Balance transfer fee is the fee that the new lender (or sometimes the original lender) would charge to transfer the outstanding balance of a loan. Add it to your cost-benefit analysis. It is normally a fixed fee or percentage of the outstanding principal.
Indeed. Missing EMIs may cause a serious decrease in credit score that increases the cost of future borrowing, and lead to late fees and late reporting of missed payments to credit bureaus.
Other lenders allow restructuring under hardship cases, part-prepayment to minimise EMI or rescheduling EMI (altering tenure or EMI). Such options will be fee-based and will depend on the policies of the lender. Always insist on request terms in writing.
Debt consolidation can be good in case the interest rate charged on the personal loan is less than the existing debts (credit cards, unsecured loans). Ensure that the consolidated EMI is affordable and it is not necessary to stretch the term unnecessarily, which will also increase the overall interest rate.
Common fees are processing fees, prepayment/foreclosure fees, late payment fees, documentation fees and, fees on add-on products (loan protection insurance). Consider all of them comparing APRs.
Most lenders can provide same-day or next-day disbursement to verified applicants who are only required to provide minimal documentation. Complicated applications (large amounts, unemployed) may require several days to process.
Getting Your Personal EMI Loan Calculations?
Make use of our highly advanced personal loan calculator, which includes a detailed amortization schedule, prepayment analysis and the capability to compare multiple lenders.
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