Among all the things borrowers need to look into when repaying a loan, two key considerations are the EMIs and the repayment term. If you get a choice, would you choose to pay a higher EMI for a shorter term or a reduced EMI for a longer one? The answer is not as straightforward, and some thought must be put into it. There are many situations where borrowers may want to alter the terms of their loans. They can either shorten the loan tenure by repaying it earlier than anticipated, or they can request an extension if they are facing difficulties in paying back on time. 

Nevertheless, you’ll need to plan your finances carefully once you pass the Personal Loan eligibility check, accept the loan, and start EMI payments. You might be in a better situation to pay back the debt if you get a promotion or salary hike. On the other hand, you might take out more loans and have trouble keeping up with payments all at once. It is important to weigh all your options carefully before making your decision.

Choosing Between A Shorter Loan Term And Lower EMIs – Which Is Better?

There are perks and drawbacks with each choice. Let’s explore them further:

  • You’ll have more breathing room to manage other bills if you lower your EMIs. However, it will raise the total amount of interest to be paid. As a result, you might end up paying a significant amount in interest for the borrowed amount.
  • A shorter Loan tenure will enable you to pay off the loan earlier than anticipated. Additionally, you will manage to save a significant sum of money on interest. But in all likelihood, your EMI payment will go up. For some, it could affect their financial flow.

Balancing the above-mentioned factors is crucial to create a responsible loan repayment plan. Now, let’s examine the effects of both repayment methods on your budget before deciding which strategy is the best.

Clarify the EMI

The amount due to be paid towards your loan each month until the loan balance is entirely repaid is known as Equated Monthly Instalment, or EMI for short. However, before you proceed to calculate EMIs, make sure you do a Personal Loan eligibility check. It consists of the interest on the loan and a portion of the principal that needs to be paid. The principal and interest are divided by the duration or the total number of months. 

The interest portion of the EMI would initially be higher and subsequently, shrink with each payment. The exact amount allocated to principal payments depends on the interest rate. Although your EMI payment will remain the same each month, the percentage of the principal starts reducing eventually.

  1. EMI reduction – Your monthly disposable income suddenly rises when you lower your Personal Loan EMI. For example: If you have a Personal Loan outstanding of ₹5 Lakh at an interest rate of 14% per year for five years, a 2% reduction in the interest rate of the loan will result in a reduction of the EMI from ₹11,634 to ₹11,122. Every month, you will have ₹512 more available. Your overall interest savings over the loan’s 5-year term will be ₹30,715 if you reduce the loan EMI. 

What Happens When You Lower Your EMI?

Loan amount = ₹5 LakhOldNew
EMI₹11,634₹11,122
Tenure5 years5 years
Interest rate14%12%
Interest Savings₹30,715
  1. Reducing the tenure – By reducing the loan’s term, you can pay the same EMI and repay the loan earlier. Keeping with the example mentioned above, if you make the same EMI payment of ₹11,634 at an interest rate of 14% in 3 years, you will save ₹82,851 in interest payments. 

What Happens When You Reduce Your Loan Tenure?

Loan amount = ₹5 LakhOldNew
EMI₹11,634₹17,089
Tenure5 years3 years
Interest rate14%12%
Interest Savings₹82,851

Which One Should You Choose?

You can save money in both situations, but the savings are significantly bigger if you shorten the loan’s term while maintaining the same EMI. However, if you are having trouble making ends meet and your monthly EMI is between 50% and 60% of your take-home pay, you might wish to choose a lower EMI.

Understanding The EMI And Tenure Relationship

The length of the loan and the EMI are inversely related. The EMI will be lower the longer it takes you to pay off your loan, and vice versa.

Personal Loan Eligibility Criteria

AgeBetween 22-58 years
Monthly salaryMinimum ₹25,000
Work experience2 years
Credit score750 and above

Age, annual income, city of residence, credit history, and credit score are typically considered when financial officers do a Personal Loan eligibility check. Therefore, do remember to make sure you ascertain your Personal Loan eligibility before applying.