Any asset purchase you make be it a brand new spanking car, a new abode for your family or possibly the latest, flashy gadget to hit the market comes with the promise of making your life better and upgrading your current lifestyle. However, that’s not the end of it whenever you make such lavish purchases invariably you also take on the responsibility of taking up a loan and paying it off through EMIs (Equated Monthly Installments).
Servicing this loan can turn into a headache especially in the long run, as you end up paying more towards the loan in the form of interest. Besides, you also run the risk of paying a penalty in case you were to miss making an EMI payment, which is why to make your life easier and to lower your loan burden, we have listed out few ways through which you can reduce your EMI:
1. Opting for a Higher Down Payment
While making a purchase, you have the option of paying a substantial amount upfront as a down payment. What this does is reduce the overall amount you need to borrow. If you can afford it, making a larger down payment makes a lot of financial sense. This will help you save big in the long run as it will not help reduce your loan amount but also your EMIs in effect.
2. Negotiating with your bank for a lower rate of interest
At the time of taking a loan, the first thing you should consider is applying for a loan at the bank where you’re already an existing customer. If you have a good relationship with your current bank, you will find yourself in a favorable position to negotiate with the bank for a lower rate of interest on your preferred loan. Lower rates of interest translate to lower EMI’s!
3. Scout the market for lower rates
In case you weren’t able to secure a lower interest rate from your current bank, another strategy you could adopt is changing your lender. With intense competition prevailing amongst financial institutions today, it’s easy for you to switch your lender to one who offers a better rate of interest. That’s not all – before making the switch, make sure to read the fine print and check for other fees such as processing fees, prepayment penalty, etc.
4. Using lump sums/bonus to make prepayments
Making part payments can help lower your loan liability quicker. For instance, if you were to get a salary raise or a bonus, instead of splurging it elsewhere, what you could do is instead make use of this amount to prepay part of your loan amount. By making a part prepayment whenever you get a chance, you’re effectively lowering the principal amount on the loan which, in turn, helps reduce the loan tenure while also reducing the total interest payable. However, you should check with your bank if they allow part-payments – not all banks offer the pre-payment facility so it makes sense to confirm the same.
In case of loans with a longer tenure, such as a home loan, you should look to try and pay an additional sum over and above your EMI amount whenever possible. By doing this, you can help drastically reduce your overall loan burden.
For example: In case you were to opt for Rs. 45 lakh home loan with a 20-year tenure at 9.5 percent interest, your EMI would work out to Rs. 41,945. Besides paying off your EMI’s regularly, if you were to pay an additional 3,500 per month, you will end up shaving off nearly 4 years from your loan tenure (16 years instead of 20 years). Moreover, you will also save an additional Rs. 12.4 lakh by way of savings on interest cost. It also makes sense for you to check with your bank about prepayment charges before you consider making any prepayments.
If you’re seeking further clarity on reducing your EMIs, do not hesitate to get in touch with 5nance’s team of experienced financial advisors for sound advice on the same.