If you’re considering a personal loan, it’s essential to analyze carefully how you want to use the funds. You only want to commit to a personal loan if you know exactly what you’ll be using the money for so that it doesn’t become an unnecessary burden down the road.
If something comes up unexpectedly or you need extra cash, a personal loan can be the right decision. What’s important is knowing where your budget will be when it’s time to pay the loan off and making sure that those payments don’t disrupt other expenses in your daily life.
When you’re getting a personal loan, make sure to read through the fine print! Many people are unaware of everything that is written in their loan agreement and end up taking out more than they can handle.
Being aware of your monthly dues when applying for a loan shows responsibility. Similarly, setting realistic goals regarding how much you will initially borrow and re-evaluating them as time goes by can help you remain in a comfortable position financially.
Here we have listed the ten best ways to reduce EMI on your personal loan.
1. Extend the tenure to manage your EMI.
One of the best ways to reduce your EMI is by increasing your loan tenure. This will help you increase the principal amount. You need to understand that longer tenure means a lesser burden on your pocket. Also, a longer tenure will mean paying more interest on the loan, but it will be worth it if you can successfully repay on time and avoid penalties or other charges.
However, do not extend the loan tenure blindly because if you are not confident of repaying on time, this little hack may backfire.
2. Borrow as low as possible.
The credit limit on your personal loan is what you’re eligible to borrow from the lender. However, it’s better if you can keep the amount borrowed low.
You can do this by either looking for a lower credit limit or by borrowing as much as required and no more.
This way, you only pay interest on the amount that you have borrowed. There are several benefits to this approach:
- If your EMI goes up due to an increase in interest rate, then a lower loan amount will mean less increase in monthly repayment.
- Your interest cost will also be lower since you will only be paying it on a smaller sum.
3. Maintain a high credit score.
You can avail of the lowest interest rate if you have a good credit history. Lenders consider your past repayment records, the frequency of credit inquiries, and other factors while determining your credit rating.
An excellent CIBIL score (750 and above) gives you a better chance of getting a low interest personal loan. If you maintain a good credit score, you will also get a higher loan amount sanctioned. Thus, if you keep up with paying off your EMIs regularly and diligently build up a good credit history, it will work in your favor in the long run.
4. Check with multiple lenders.
The EMI on your personal loan is made up of the principal amount (the amount you borrow) and the interest charged by the lender. Your EMI can be calculated using an online personal loan app EMI calculator.
When comparing lenders, you should check how much interest they charge on their loans along with other factors like processing fees, prepayment charges, and credit score requirements:
- Check with multiple lenders to find the lowest interest rate. Interest rates can vary between lenders, so it’s important to shop around for the best offer.
- Check the fine print for hidden charges, such as processing and prepayment fees. Some lenders charge these fees if you close your loan before its term or if you miss payments on your loan.
- Read all of a lender’s terms and conditions carefully before applying to avoid extra costs.
- Check the lender’s credit score requirement. Some lenders require borrowers to have good or excellent credit scores, while others are more flexible with their eligibility criteria.
If you have bad credit, check if any lending companies will approve your application based on other factors like income and employment history.
5. Shop around for the best deal.
It is always a good idea to shop around for the best deal. Don’t go for the first offer that comes your way. Check the interest rates, tenure, and other features of the loan.
Some factors to keep in mind while comparing personal loans are:
- Interest rate: This is one of the most crucial factors you need to consider while choosing a personal loan. A higher interest rate will lead to a higher EMI amount and thus would increase your repayment burden.
- Tenure: This is an important factor as it directly impacts your EMI amount and monthly repayment amount.
A longer tenure will reduce your monthly EMI, but you end up paying more interest through the loan tenure. On the other hand, if you choose a shorter tenure, then your EMI will increase, you will be able to repay it sooner and save on interest costs in the long run.
6. Go for a secured one.
Do you want to take a personal loan? For example, are you planning to renovate your home, start a new venture or meet travel expenses? If so, then you should consider taking a secured one.
This type of loan has multiple benefits over unsecured loans. Let’s find out what they are.
- Secured loans have lower interest rates and, hence, lower EMIs than loans that require no collateral.
- Accordingly, this type of loan is more economical in the long run and will help you save money on interest payments.
- You can get better flexibility when choosing the tenure for the repayment period of the loan.
- You can choose from a broader range of tenure, say between 2 and 10 years.
7. Opt for balance transfer and take advantage of lower EMIs.
A balance transfer of a personal loan is a process through which you can transfer your outstanding loan from one bank to another.
The new bank might offer you a lower rate of interest than the current lender, hence you will be able to reduce your EMI burden by transferring the existing balance to the new lender.
Let’s say that you have taken a personal loan from Bank A at a 14% interest rate for three years with an outstanding of Rs. 70,000. If Bank B comes up with an offer offering a 12% interest rate for three years on your existing amount, then it would make sense for you to switch the lender and opt for lower EMIs.
8. Manage your debt-to-income ratio.
Managing your debt-to-income ratio and keeping it as low as possible is vital for getting a personal loan sanctioned.
The debt-to-income ratio indicates how much you are borrowing from various sources to run your monthly expenses.
Banks and other financial institutions look at this figure while sanctioning any loan. A high debt-to-income ratio means that you have less disposable income, which can cause concern for your loan application.
9. Be prepared with a good credit history.
Credit history is an account of one’s relationship with money, which is determined by the timely repayment of previous debts.
Maintaining an excellent credit history requires staying debt-free, avoiding borrowing from multiple lenders at once, and making only minimum payments on your credit card.
But what if your credit history isn’t as great as you’d like it to be? Well, there are a few ways to improve it:
- First, check that your report has all the information about you in order and includes all the loans/credit cards you have ever held.
- If you’ve never had any loans before and thus lack a credit history altogether, consider applying for a small loan to build a good credit record.
10. Ask your employer to deduct at source before you receive the monthly salary.
One way to reduce your installment is to ask your employer to deduct the EMI amount from your monthly salary before crediting it to your bank account.
This will ensure that you don’t miss payment deadlines, and you can also make a lower personal loan EMI payment.
You need to check your finances and have reasonable control over your EMI if you have taken a personal loan. There are many ways in which you can reduce the EMI each month and make it more manageable.