Anup bought a car after taking a loan of Rs 3.5 lakhs. He was paying Rs 7, 538 per month towards EMI. When his friend Sharad found out about it, he told Amit to think about reducing his monthly EMI, as he was paying too much to his lender. What should Amit do? Why should Amit lower his EMI?
Read on to know how Amit should go about lowering his EMI.
Importance of lowering EMI: Whenever you take a loan, you have to pay interest on the borrowed amount. This interest is an expense.
Higher the interest rate, higher the amount you pay towards interest. So you end up paying more towards the loan, thus making the purchase costly. Hence it is essential for you to reduce the amount you pay towards your EMI.
How to lower your EMI: There are various ways in which Amit can reduce his EMI. Here are some common methods of reducing your EMI:
Negotiate with bank for lower rate: If Amit banks with the same bank from which he had taken the loan, and has a good standing with the bank, he can negotiate with them to reduce the interest rate on his loan. In order to attract customers with good standing, many banks are willing to lower their interest rates on their loans.
So this is the first strategy Amit should use. But in case if his bank refuses to bargain with him to lower his interest rate, then he should
Change lender: With the competition amongst the lenders intensifying and the market being penetrated by new lenders who offer competitive loans, it is easy for Amit to change his lender. But while changing lenders it is important not only to consider the interest rate charged but also other fees like processing fees, prepayment penalty, etc.
These fees and charges add up, thus making the loan quite expensive. At the same time, it is important to consider the charges charged by your current lender for letting you switch over to a new one. It is equally important to find out the quality of customer service of the new lender. It will help you in getting your problems solved in case if you face any problems while meeting your loan obligations.
Prepay: If Amit gets a salary raise or a bonus, he can use this amount to prepay all or part of the loan. With part prepayment, the principal amount goes down, automatically the loan tenure comes down, reducing the total interest payable.
The higher the amount outstanding, higher the interest you will have to pay on it. Loans are not only financial burden, but they also cause emotional stress. By prepaying the loan, you end up reducing your loan tenure and hence both financial and emotional stress.
Pay off higher interest loans first: If Amit has a home loan, personal loan and credit card loan first, he should first pay off the credit card loan first, as this loan carries the highest interest rate. Once he pays off the credit card debt, next he should opt for personal loan, and then ultimately the home loan.
While paying off the higher interest loans, he should continue to pay the minimum amounts on the other loans. Once the higher interest loan is paid off, he can use the amount saved towards the next higher interest loan and continue till all the debt is repaid.
Loans have become a major expense in our modern lives. They not only cause financial stress but also emotional one. Hence you must take steps to reduce the EMIs and loan tenure, thereby reducing total loan cost.
Simple steps like bargaining for lower rate, changing lender, prepaying and repaying higher interest loans first will help you save money in the long run.