- EMI Calculation
If you plan to prepay your loan, then figure out the exact or approximate amount you intend to prepay and the periodicity of such payments depending on your loan agreement.
Use online calculators to key in or match these loan parameters
The calculator will then work out the exact pattern of your loan repayment.
Aspects such as the amortization table, the total interest outgo, the timelines of your loan repayment etc. will be displayed in accurate detail enabling you to make smart loan decision
What is EMI?
Equated Monthly Installments (EMI) means just that! It refers to equal sums of money paid out every month until a loan is fully repaid. The EMI remains a constant during the entire tenure of a loan but when a revision happens in the interest rate, sometimes the EMI increases, with or without any change to the repayment tenure. This is true in the case of a floating interest rate loan where the revision is applied to the outstanding loan amount at that point in time.
Principal and interest ratio in EMI!
So if EMI is a constant does that mean you repay the principal and interest also split equally? No, that is not the case! The amortization table that your bank will provide when the loan repayment begins will help you see how the principal and interest component are combined in the EMI. In the initial years the interest portion of the EMI is much higher compared to the principal portion of the EMI. In the latter years of the loan tenure the reverse is true. So if you think in a 10 year loan, you have actually repaid 50% of your outstanding loan amount, look again at your amortization table to realize this is not the case!
Understanding Loan Repayment Tenure
Loan repayment tenure is the number of years it takes to repay a loan. In the case of a floating interest rate loan, periodic interest rate revision happens depending on market conditions. In such instances, mostly the repayment tenure is increased while the EMI is kept constant. However, this may not be the case always! If the borrower is closer to his retirement age, the EMI maybe increased and not the tenure. Also, in the case of several consecutive interest rate hikes sometimes both the repayment tenure and EMI are increased to accommodate the repetitive hikes.
Relationship between EMI and loan tenure
Let us consider the example of a car loan. What is the difference for the borrower who takes up a 3 year car loan repayment tenure compared to an individual who takes up the 5 year repayment tenure for his car loan at the same interest rate? The former repays the loan in 3 years with a higher EMI while the latter repays the loan with a comparatively lesser EMI in 5 years.
The Interest factor in loan repayment tenure
The interesting aspect (pun intended!) is that longer tenures result in higher interest outgo and the reverse is true in the case of shorter tenures. Before you decide to take up any loan you need to calculate the total interest cost, which means how much interest you will pay in total at the end of your loan repayment tenure! This usually comes in handy when you are faced with the choice of choosing between two loan offers. Understanding how the total loan cost works out by factoring in total interest outgo, processing fee and other charges built into the loan offer will help you arrive at a good loan decision.
The Prepayment factor
When you prepay you actually reduce your loan repayment tenure and hence the total interest outgo! How does this work? Every time you prepay, the prepaid amount gets directly deducted from your outstanding principal amount and even by prepaying small amounts on a regular basis and you can bring down your repayment tenure and thereby your total interest component in the loan significantly down!
How to make the most of your loan repayment!
Ideally you should opt for a safe loan repayment tenure, which allows you to spend no more than 40-50% of your monthly income towards your loan repayment! Prepay when you get your yearly bonus or a sudden financial windfall or hike in salary! You can also set aside some money to periodically pay small amounts every quarter to help close your debt early and save on interest!
It helps you make better loan decisions, if you do your research, plan your finances and know what to expect from a loan situation!