What factors influence your EMI? A comprehensive guide for borrowers

Considering a personal loan? You may be reflecting on how it will affect your monthly budget, and justifiably so. Taking out a loan and handling the equated monthly instalments (EMI) can be stressful if you do not grasp what influences your EMI amount.

As a borrower, it's essential to understand the key factors that determine your EMI for better financial planning. This article clearly discusses these factors to assist you in making informed decisions.

1. Interest Rates

The interest rate applied to your loan is the most significant factor influencing your EMI. Typically, interest rates are:

● Floating (tied to an external benchmark such as the repo rate)

● Fixed (remains unchanged throughout the tenure)

As banks extend loans to individuals without any collateral or backing, such as personal loans or credit cards, the resulting EMIs are usually high. Conversely, they tend to offer lower interest rates on loans secured by an asset, such as a home or car.

Before borrowing, compare the interest rates offered by various lenders to secure the best deal. If you seek rate stability, choose fixed rates. IDFC FIRST Bank’s FIRSTmoney provides a fixed interest rate with a reducing balance facility that decreases your loan amount while keeping the EMI fixed for the entire tenure. What distinguishes FIRSTmoney is its competitive interest rate of ₹10.99% and zero foreclosure charges, allowing you to close your loan at any time without penalties.

2. Loan Tenure

Loan tenure refers to the time allotted for repaying the loan. A typical tenure for:

● Home loans – available for up to 30 years

● Personal loans – 1 to 5 years

● Credit cards – a period of 45 to 50 days

The increased term reduces the EMI.

For example, if a customer takes a personal loan of ₹ 5 lakhs with a tenure of 3 years or 36 months, the EMI is approximately ₹ 300. However, if the same amount is borrowed for 5 years or 60 months, the EMI would decrease to ₹10,800.

Assess your repayment capacity before selecting a tenure. Avoid tenures that exceed your retirement age to prevent potential payment issues later. FIRSTmoney, as a smart personal loan, allows you to choose a favourable tenure ranging from 9 months to 12 months, enabling you to comfortably repay your loan without financial strain.

3. Loan Amount

A higher loan amount directly leads to a higher EMI. For example, if you take a personal loan of ₹5 lakhs versus ₹10 lakhs at the same interest rate and tenure, the EMI for the ₹10 lakh loan will be double that of the ₹5 lakh loan.

Carefully evaluate the loan amount you truly require before borrowing a large sum. This will help keep your EMI within manageable limits.

With FIRSTmoney, you can obtain loan amounts of up to ₹10 lakhs instantly based on your eligibility and financial planning. You can use it for any purpose without constraints.

4. Credit Score

Your credit score reflects your history of borrowing and repayment. Banks typically offer lower interest rates for scores above 750. If your score is low due to defaults or delays, you may face higher interest rates, which will increase the EMI. Begin building your credit score well in advance of applying for any loan. Make timely repayments, avoid making multiple loan applications in a short timeframe, and keep your credit utilisation low. With FIRSTmoney, you can secure a personal loan at competitive interest rates with a credit score of 730 or higher.

5. Insurance and Other Charges

For some loans, additional components are included in the EMI, such as:

● Mortgage insurance for home loans

● Health or life coverage bundled with personal loans

● Credit protection for credit cards

These can increase your expenses by several hundred or even a thousand rupees. Verify whether the insurance coverage provided by banks meets your needs to avoid paying for unnecessary products.

The Bottom Line

Carefully examining the five parameters mentioned above can optimise your EMI according to your financial capability. Utilise online EMI calculators to estimate your expenses under various combinations of factors. Prudent assessment and planning contribute significantly to maintaining loan repayment discipline.

If you are considering borrowing, opt for a smart personal loan like IDFC FIRST Bank’s FIRSTmoney, which provides unique benefits such as zero foreclosure charges, a fully digital process, competitive interest rates, extended tenures and great flexibility to secure a suitable loan amount. Apply today and manage your finances effortlessly.