Our life is full of uncertainties, throwing surprises at us at every moment. In times of an emergency or urgent cash requirements, we can always rely on a Personal loan. A Personal loan is a good option as it is unsecured; no mortgage or guarantee is required. Digital lending platforms offer online personal loans with minimal paperwork and verification time making it a good source for emergency funds.
When you borrow from a financial institution such as a bank or digital lending platform, repayment of the personal loan dues through periodic payments include principal payment plus interest. This periodic payment is called an Equated Monthly Installment.
How is the personal loan EMI calculated?
The formula to calculate an equated monthly installment is:
Here P is the personal loan amount, R is the yearly rate of interest and N is the loan tenure period
Digital lending platforms help you check your loan EMI by making use of an EMI Calculator. The calculator takes as input the EMI amount you are capable of paying and the tenure you want the loan for, and calculates the loan EMI amount for each month. This will let you know if you are financially capable of paying the EMI each month.
Once you take a loan, digital lending platforms allow you to track EMI payments and due dates through their loan management system.
Things to keep in mind while applying for a personal loan
- Choose the EMI carefully – Ensure you are able to afford the EMI every month. In case you are have trouble paying your credit card bills or do not have enough balance in your account to allot for the EMI, and then select an EMI amount that is feasible. Ensure the EMI payment does not disrupt your monthly savings budget.
- Prepayment of loan – In those instances when you receive a bonus at work or save enough in your budget, opts to clear the personal loan ahead of the loan payment tenure. Banks usually charge a prepayment penalty for clearing the loan early, unlike digital lending platforms.
- Interest rates – While applying for a personal loan at banks keep an eye out for the interest rates. Banks charge a fixed interest rate on the EMI which does not fluctuate during the tenure of the personal loan.
- EMI payments – Ensure that you do not delay in your EMI payments as this could lead to a penalty which is a percentage of the EMI you pay. Avoid these extra charges and expenses by being prompt with your EMI payments.
Failure to make an EMI payment could lead to…
- Credit bureau score hit – Missing an EMI payment can affect your credit bureau score badly. Credit bureaus maintain the records of your financial information collected from banks and lending platforms. If you miss out on EMI payments then this indicates that you are not prudent enough with your loan responsibilities.
- Risky borrower tag – Along with a drop in credit score points, you will also be tagged as a ‘risky borrower’ by the credit bureau. This will affect your chances of getting a loan approved in the future because banks and digital lending platforms will look at how you maintain your credit history and wouldn’t want to lend to a risky borrower profile.
Types of loan repayment options
Selecting a flexible loan repayment option holds a big advantage in case you find it difficult to repay the loan. You can opt for any one of the following loan repayment options at banks or financial institutions.
- Accelerated repayment option – As the name suggests this option allows you as a borrower to increase the EMI amount each month. You could do this in case you receive a surplus in income via increment or get a bonus. Increase in the EMI amount can save the additional amount you would have spent in the form of interest on loan taken. This is better than reducing the loan tenure because by reworking the existing EMI you can repay the loan faster.
- Step up repayment option – In case you are a new salaried professional your salary is bound to start low and then increase as you gain experience. The step up loan repayment option starts off with a low EMI amount and slowly increases as you keep progressing in your career over the years. The advantage here is that even though you will start with a low EMI, you can show the bank or lender that you are a prompt EMI payer and that way build trust as the EMI increases over the years.
- Step down repayment option – An opposite of the Step Up repayment option, this option is ideal for a salaried individual as he is nearing the end of his career or approaching retirement. A repayment option nonetheless, the EMI here reduces over the years as and when your professional career comes to an end. It is a customized option for professionals who expect their income to gradually decrease down the years.
- Balloon repayment option – Like a balloon that swells, this repayment option allows you as a borrower to pay lower EMIs in the beginning years of your loan tenure. The difference to step up loans is that more than one third of the loan amount is paid during the last installments.
It is important that you take timely loan repayments seriously if you want to ensure a tension free loan repayment process.