A few tips to manage your EMI efficiently

First thing to come in one’s mind when he or she aspires to buy a home through loan is how much the EMI would be? EMI aka Equated Monthly Installment, is an oft-repeated word by banks or lending institutions, whether it is for home loan or vehicle loan.

Simply put, EMI is an amount to be paid back to the lender on every month against the loan taken for purchasing a property or any other movable or fixed assets. This amount basically contains two parts – principal and interest, which is charged as per the agreed interest rate against the loan amount. This varies every month as the loan amount keeps decreasing months after months.

One should understand one’s pay back ability, age, cash in hand to decide the loan amount. There are other factors one should bear in mind. If a person is purchasing a home away from the city limits due to financial or other constraints, he wouldn’t get any concession as for an interest rate is concerned. He will have to pay back with the same interest, whether he buys a property within the city limit or outskirts.

So, since his chance of living in his new house is not so bright due to various factors like proximity to office, schools and market places, etc., he may think of giving the house on rent. He should calculate the possible rentals prevalent in the area and can adjust his loan amount according to that calculation.

Now, coming back to the EMI part, it is always not possible to buy a home when the interest rate is at its nadir. If a person wants to buy a home, he can see only location and budget, which are under his control. 

Interest rate fluctuates according to economic development and individuals have no say in it. So, once the project is fixed and all other elementary calculations done, one should approach bank with necessary documents.

Now-a-days, all banks advertise the prevalent interest rate in their website and provide EMI calculator to find the exact amount he has to pay for an amount one takes as loan.

One has to simply fill vital details such as amount to be financed, tenure, interest rate and floating or fixed rate of interest to get the approximate amount of EMI one has to pay to the lender month after month.

One should not assume that Equated Monthly Installment means both principal and interest amount will be in equal proportion. Though it becomes equal after certain number of years (only for a month or so, that too approximately equal), initially the principal part will be very less and interest part will be more. 

Since interest is calculated on the basis of diminishing loan amount, its part gets reduced and to balance the EMI, the principal part would go up automatically. So, at the end of the term, the principal part will be very high and interest part will be too low.

During the tenure, it can be 10, 15, 20 or 25 years, if the rate of interest goes down, borrowers have the option to readjust their EMI and tenure to reduce their burden.