If you’re feeling the pressure of your personal loan EMI and want to reduce your monthly installments, there are several practical and effective solutions available to you. With proper planning and a strategic financial approach, not only can you lower your EMI, but you can also save on the total interest paid.
Personal loans have become an important financial tool in today’s fast-paced life. They provide immediate assistance for urgent needs such as medical emergencies, weddings, education, or other unexpected expenses. However, they also come with a significant drawback: high interest rates and substantial monthly installments (EMIs). If your personal loan EMI is putting a strain on your finances, don’t worry. In this article, we’ll outline five smart strategies to help you reduce your loan EMI and achieve financial relief.
Balance Transfer: Leverage Lower Interest Rates
Balance transfer is the most prevalent and effective method for reducing personal loan EMIs. If you’ve taken out a personal loan from a bank or NBFC charging a higher interest rate, you can transfer the outstanding balance to an institution offering lower rates. This can decrease your EMI and also save you money on interest.
How to Perform a Balance Transfer?
- First, search for a bank or NBFC offering lower interest rates.
- Compare their terms and processing fees.
- Check for prepayment charges related to your existing loan.
- Apply to the new bank to initiate the loan transfer process.
- Calculate the new EMI after the transfer is complete.
Caution: Assess the total cost by considering all charges, such as processing fees and documentation fees, not just the interest rate.
Extend the Loan Term: Find Relief in Lower Monthly Payments
If your EMI is consuming a large portion of your monthly income, you can request the bank to extend the loan term. This will reduce your monthly EMI as it’s spread over a longer period. This option is particularly useful for individuals with stable income but limited cash flow.
Example: Suppose you took out a 5-year loan at a 10% interest rate for ₹500,000. Your EMI would be approximately ₹10,624. If you extend the term to 7 years, your EMI could decrease to around ₹8,074.
Drawback: A longer term means paying more interest overall. Therefore, consider this decision carefully.
Prepay Your Loan: Take Control with Extra Payments
If you have additional income from bonuses, gifts, investment returns, or other sources, you can prepay a portion of your loan to reduce the outstanding balance. This will decrease the interest burden and potentially lower your EMI or accelerate the loan repayment.
What Banks Allow?
Most banks allow prepayment after a few initial installments. Some charge fees for this service, while others don’t. Therefore, clearly understand the bank’s terms and conditions.
Benefits of Prepayment:
- Reduced total interest paid
- Faster loan repayment
- Greater financial planning flexibility
Step-Down EMI Plan: Gradual Reduction in Installments
A step-down EMI plan involves higher EMIs in the initial years, which gradually decrease over time. This is beneficial for individuals whose income is higher initially but expected to decline in the future.
How Does This Plan Work?
As you repay the principal, the interest calculation decreases, and consequently, the EMI also decreases. Banks like HDFC, Kotak Mahindra, and ICICI offer this plan.
Advantages:
- Strategic loan repayment flexibility
- Faster repayment in the early years
- Support for future expenditure plans
Improve Your Credit Score: Secure Lower Interest Rates
Your credit score plays a significant role in determining the interest rate on a personal loan. If your score is above 750, banks are more likely to offer you a loan at a lower interest rate. This can help you reduce your EMI.
How to Improve Your Credit Score:
- Make timely EMI and credit card payments
- Spend within your credit limit
- Close unnecessary credit cards
- Maintain a consistent credit history
Result: A better credit score leads to lower interest rates and increased eligibility for larger loan amounts, which naturally reduces your EMI.
Other Measures to Consider
- EMI Moratorium: Some banks offer a temporary suspension of EMI payments during times of crisis.
- Auto-Debit and Alerts: Set up automatic payments or receive alerts from the bank to ensure timely payments.
- EMI Calculator: Use online tools to plan your EMI payments before making a decision.
- Financial Consulting: Seek advice from a financial advisor if your debt is overwhelming.
