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Everything You Need to Know About EMI
Smart EMI Planning Tips
- Keep EMIs below 40-50% of monthly income for financial stability
- Compare interest rates - even 0.5% difference saves lakhs
- Choose tenure wisely - longer tenure means lower EMI but higher interest
- Make prepayments when possible to reduce total interest
- Maintain good credit score (750+) for better interest rates
- Consider fixed vs floating rates based on market conditions
- Factor in processing fees and other charges
- Keep emergency funds separate from EMI commitments
Understanding EMI
EMI (Equated Monthly Installment) is the fixed monthly payment you make to repay a loan. It includes both principal and interest components.
EMI Formula:
EMI = P × r × (1 + r)^n / ((1 + r)^n - 1)
Where P = Principal, r = Monthly rate, n = Number of months
Key Components: Your EMI consists of two parts - principal repayment and interest payment. Initially, interest component is higher, gradually decreasing over time.
Frequently Asked Questions
What is a good EMI to income ratio?
Ideally, your total EMIs should not exceed 40-50% of your monthly income. This ensures you have enough for living expenses and emergencies.
Should I choose longer or shorter tenure?
Shorter tenure means higher EMI but lower total interest. Longer tenure reduces EMI but increases total interest. Choose based on your monthly affordability.
Can I change my EMI after taking the loan?
You can prepay to reduce principal, refinance at better rates, or request EMI restructuring. Some banks offer flexible EMI options.
What happens if I miss an EMI payment?
Missing EMI attracts late payment charges (2-3% per month) and affects credit score. Multiple defaults can lead to legal action.
Is prepayment beneficial?
Yes! Prepayment reduces principal amount, saving significant interest. Most banks allow partial prepayment without charges for floating rate loans.
How does down payment affect EMI?
Higher down payment reduces loan amount, resulting in lower EMI or shorter tenure. It also improves loan approval chances.
Complete EMI & Loan Guide
Everything you need to know about loans and EMI planning in India
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