What is an EMI and How is it Structured?
An Equated Monthly Installment (EMI) is a fixed payment made by a borrower to a lender on a specified date each calendar month. EMIs consist of both interest and principal repayments. In the early years of your loan, the majority of your EMI goes toward paying off the interest, while the principal is reduced very slowly.
The Danger of Long Loan Tenures
Many borrowers choose a 30-year loan tenure because it reduces the monthly EMI. However, this dramatically increases the total interest paid. Let's look at the numbers using our EMI Calculator for a loan of ₹50 Lakhs at 8.5% interest:
- Tenure of 15 Years: Monthly EMI is ₹49,270. Total interest payable is ₹38.6 Lakhs.
- Tenure of 30 Years: Monthly EMI is ₹38,446. Total interest payable is ₹88.4 Lakhs.
By stretching the tenure by 15 years, you reduced your EMI by ₹10,800 but paid an additional ₹50 Lakhs in pure interest! That is equal to taking another loan!
How Prepayments Save You Lakhs
Making a prepayment of just 1 extra EMI every year, or increasing your EMI by 5% annually, can cut your loan tenure by 5 to 8 years and save you massive amounts of interest. Prepayments directly reduce the loan principal, immediately cutting the compounding interest charge.
Plan Your Repayment Timeline
Before applying for a loan, drag the sliders on our EMI Calculator to find the sweet spot where your EMI is affordable, but your interest is kept to a minimum.