In this era of developments, more people are choosing to take loans as compared to the past. The banks and some non-banking finance companies are also offering various loans to women, students, etc., providing the best home loans. But it is crucial to plan your loans, to avoid getting caught in a debt trap.
What is EMI?
Besides principal borrowed and interest rates, EMI plays a significant role in taking a loan. EMI (equated monthly instalment) is a small fixed instalment. The borrower pays it to the lending entity, usually monthly, to repay the loan in a given time frame.
Factors That Affects EMIs
Some factors that affect EMI are:
- Principal Borrowed: This is the money one borrows from the bank. As you keep paying the EMI, the net loan gets deducted from this amount. As a result, this reduces the interest that has to be paid. Then, the principal becomes the amount borrowed from the lender, excluding the amount paid.
- Rate of interest: There are two types of interest on the loan: fixed-rate loans and floating-rate loans. In fixed-rate loans, the interest charged remains constant throughout the term of the loan. This means that as time progresses, the amount you pay keeps reducing with every EMI as your principal keeps reducing. On the other hand, in floating-rate loans, the interest rate changes depending on the market's current situation.
- Income: Income plays a vital role in planning a home loan EMI. This is because, while borrowing a loan, you need to plan how you will repay the loan well into the future. In the beginning, paying the EMI might feel like a task, but it will get better in due course of time. In case you have stable earning now, and you predict that there will be continuous growth in the future, you can continue paying high EMIs.
- Expenditure: It is necessary to consider your expenditure while taking a loan. Not only the expenses that you encounter in the present but future expenses also. You also need to think about the extra costs you, most likely, will encounter in the future, for example, if you have kids, their expenses, medical expenses, inflammation, etc. If one plans to save some money for the future, then one must take that into approximation while managing finances to repay EMI.
- Term of the loan: The loan term, also called tenure, plays a crucial role in determining how long you will continue to pay the EMI. Say you choose to keep the tenure short; you will have to pay larger chunks of money in shorter periods. But if you choose this, you will have to pay higher interest as your principal will also be high. Another way is to keep the tenure long, say 15-20 years so that you keep paying smaller chunks of your salary for a more extended period. In this case, your interest will be small.
Conclusion:
Today it is easier than ever to get a loan for anything you want with the low interest home loans. But it is equally important to plan your EMI in a healthy- mannered way before you take the loan so that you and balance your expenditure.
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