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New Delhi: Most people only pay attention to low EMI while opting for a personal loan. But ignoring the matter of the duration of the EMI and how much total interest will have to be paid can prove to be a big mistake. This mistake gradually puts a big burden on your monthly salary. In this article we will understand how to choose an EMI period, what mistakes can trap an individual in debt trap and how to take a personal loan wisely.
Nowadays, it has become much easier to get a personal loan. Mobile apps, banks and NBFCs approve loans in just a few minutes. Suddenly people take out loans without thinking much for medical expenses, marriage or other needs. But the real trouble starts after getting the loan, when the monthly EMI seems to eat up a big chunk of the salary.
While choosing an EMI most people only look at how much money will be deducted per month. Several individuals don’t pay much heed to how much interest they pay in total, together with the term of the loan and the interest rate. Taking a loan for a long term increases the total interest. In such a situation, if you need to take out another loan in a few years, then it becomes a huge burden.
The most important decision while determining EMI is the term of the loan. Many people prefer a longer term by falling into the greed of low EMI. At first this decision seems to be relieving, but in the long run the same decision becomes a financial difficulty, since the total interest increases significantly.
Proper EMI is one that can maintain a balance between your income and expenses. As a general rule, the total EMI of all your loans should not exceed 30 to 35 percent of your monthly income. For example, if your salary is Rs 50,000, all EMIs combined should not exceed Rs 15,000 to Rs 18,000. This way you can easily handle money for household expenses, savings and emergencies.
If the EMI becomes higher, the home rent or home loan EMI, car loan, children's fees and daily expenses together cost half of the salary or more. In such a situation you will not even realise how it is liquidated as soon as the salary comes into the account.
Low EMI sounds very attractive at first and the budget seems simple. But in the long run this decision hinders your financial development. Longer term means more gross interest, longer debt and less savings for other needs. Many people continue to pay personal loan EMI for 6—7 years and are forced to take out a new loan again during this time. This position is called the turning cycle.
The formula of EMI seems complicated to many people, meaning they only rely on the EMI shown in the bank or app. But it is very necessary to understand how much the total payment will be before taking a loan. Always consider loan amount, interest rate and duration — all three factors together. It is prudent to compare EMI and total interest for different terms through the EMI calculator.
Many people choose time periods just by looking at EMI, and not comparing total interest, take higher EMI in the hope that salaries will increase in the future, do not think by collecting the EMI of all loans and do not keep any savings for the crisis. The result of these errors is that every month the salary is exhausted as soon as it arrives.
Banks place greater emphasis on EMI when granting loans, but do not clearly show how much total interest will have to be paid. Many apps show a long duration for EMI to appear low. It is therefore very necessary to read the offer letter and payment schedule carefully before taking out a loan. The EMI may seem small, but the total payment may surprise you.
If you have to take a personal loan, plan to repay the loan as soon as possible. Make a prepayment from bonuses or additional income. Do not keep the EMI period unnecessarily long and review your budget every year. This way the loan will not become a burden for you.
