Personal loans are a great way to help you during a financial crisis. Anyone can experience a sudden need for funds due to unexpected events. A personal loan can be availed by people who meet specific criteria in a very easy manner.
Personal loans are unsecured financial instruments, which means that the lender takes all the burden. Borrowers don’t have to provide any asset as collateral or get a co-guarantor either. It’s why personal loans come with the highest interest rates among all loan types. The interest rates also depend on the CIBIL Score and income of the borrower.
While taking Personal Loans, the borrower must know how much they would repay as EMI’s. EMI’s are Equated Monthly Installments, the total loan amount (Including interest) divided into a certain time. It is the most common repayment method provided by lenders.
Paying a hefty sum every month could be troublesome after a certain time. So, here are some tips on how a lender can reduce the Personal Loan EMI Burden:
- Increase your Repayment Tenure: It is the most basic and the easiest method to reduce your personal loan EMI burden. The EMI amount is calculated based on the total loan amount divided by months (Loan Tenure). Therefore if the borrower opts for the longest tenure for repaying the loan amount, the monthly EMI amount will automatically come down.
Although there are a few drawbacks of opting for a longer tenure, your EMI amount will be reduced, the interest rate charged for your loan may increase. Longer EMI’s attract higher interests. Below is an example of how you can reduce your EMI by simply improving your loan tenure.
In the table above, the Loan tenure increases from 2 to 5 years. In the 2nd case, the loan amount and the interest rates remain the same. By changing just the loan tenure, the EMI payable decreased from 4,707 to 2,224.
A borrower can easily calculate their monthly EMI’s by using the Personal Loan EMI calculators online. You just have to input the details, and you can find out your EMI within seconds.
- Part Prepayment of the Loan amount: Another easy way to help reduce your EMI is to repay a certain part of your total loan amount. The EMI’s payable will automatically reduce when your total loan amount comes down. As mentioned above, the EMI amount is calculated based on the total loan amount and the loan tenure.
In the option above, we increased the loan tenure, which helped reduce the EMI burden. In this option, we are reducing our total loan burden, which will help bring down the EMI amount. After paying a certain sum, you can easily use the Personal Loan EMI calculators to check your EMI’s going forward.
You must check with your borrower for the prepayment charges and penalties. Prepayment of any kind can attract heavy penalties or charges from lenders. But this method is very effective for borrowers who wish to reduce their EMI burden.
- Co-applicant or Guarantor: Getting a co-guarantor provides added security and assurance to the lenders. Usually, the interest rates on Personal loans are high because they take all the risks. So if you get a co-applicant or guarantor for yourselves, your lender may decrease the interest rates on your loan.
There is a simple policy that every business follows. “Higher the risk, Higher the profit/gain“. It’s why the lenders can charge very high-interest rates on Personal Loans because they take all the risks. But when you bring a co-applicant, the risk on the lenders is reduced substantially.
- Reduce your loan amount: Personal loans come with very high-interest rates, even though these loans can be beneficial during a financial crisis. Repaying the loan can be a huge burden, and you stand to lose a lot of money in the high-interest rates these loans carry. The interest rates of Personal loans can go as high as 25%.
Therefore, you should take the minimum amounts in personal loans and manage the rest through your investments or borrowing from family and friends. If your loan amount is less, your EMI won’t be very high, and you repay them conveniently.
- Opt for a different loan type: You can put assets as collateral if you have assets available with you, like land or gold. This way, you can reduce the interest rates on your loan amount substantially.
In Personal loans, you don’t have the option to put anything as collateral. So, if you have gold, you can opt for Gold Loans. The interest rates on Gold loans are almost half of Personal loans. You get the option to repay the loan amount in EMI in Gold Loans as well. With lower interest rates, you can reduce your EMI burden.