EMI vs Tenure: The Secret Equation Behind Your Loan Tenure

When you are thinking to borrow money through personal loan, Equated Monthly Installment (EMI) is the factor that must be analysed for a financially comfortable experience.

A number that shapes the overall experience and financial implications. Have you ever wondered how EMI calculation directly affects your loan tenure?

Let’s quickly understand the relationship between these two.

What Is EMI?

EMI (Equated Monthly Instalment) is a fixed payment amount made by a borrower to a lender on a specified date each calendar month.

It includes both principal and interest components.

The basic formula used to calculate EMI is:

EMI = [P x R x (1+R)^N] / [(1+R)^N - 1]

Where:

• P = Principal loan amount

• R = Monthly interest rate (annual rate divided by 12 x 100)

• N = Loan tenure in months

Relationship Between EMI and Loan Tenure

EMI and loan tenure work in opposition to each other. If you increase one, the other usually goes down, unless you also change the loan amount or interest rate.

1. Higher EMI = Shorter Tenure

If you can afford to pay a higher EMI, your loan will be paid off faster.

For example:

Loan Amount: ₹5,00,000.00

Interest Rate: 11% p.a.

For 5 Years (60 months):

EMI = 10,873.00

For Years (30 months):

EMI = 19,139.03

We can see here how multiplying the EMI reduces your loan tenure in half and lowers total interest paid over a certain period of time.

2. Lower EMI = Longer Tenure

If you are going for a lower EMI, your loan will be for a longer period which can increase the total interest you need to pay over time. This is useful if you have a tight monthly cash flow, but it could cost more in the long run.

For example: Same loan, but tenure increases to 7 years:

EMI = 8,561.00

Why EMI Tenure Matters?

While a higher monthly EMI may cause some stress, a longer tenure may afford you with financial breathing room, but comes with increased repayment period with a much larger total amount to be repaid. Here’s how EMI affects your tenure decision:

If you choose to proceed with a shorter loan tenure,

Benefits:

1. You pay lower total interest at the end of your tenure.

2. You can clear your debt faster.

3. You get a chance to improve your credit score faster when you pay your loan regularly.

Challenges:

1. It gives you Higher monthly financial stress.

2. May lead you to compromise your other financial commitments.

If you choose to proceed with a shorter loan tenure

Benefits:

You get easier monthly EMIs.

It is suitable during the period of uncertain income periods.

Challenges:

You have to pay more total interest at the end of the tenure.

Your debt would last longeer creating financial stress.

It can hamper your future loan eligibility.

How to Choose the Right Tenure

1. Consider Monthly Cash Flow: Before understanding and committing to an EMI, situate your monthly outgoings through a budget that can help you balance the amount which will go out each month with the monthly repayments, so you can live comfortably.

   
   

2. Understand Total Interest: Research online EMI calculators and get to know how your loan interest baselines alter with various tenures.

   
   

3. Keep Your Future Plans in Mind: If you have possible big life moments ahead of you like buying a house, an education, or a dream destination, plan for them and set your EMI accordingly.

   
   

4. Prepayment facility: Many lenders permit part-prepayment or a full prepayment. Having an option to reduce your tenure well in the future, even if you want to start with a lower EMI can be a good option.

Final Thoughts

Finding out your EMI is a way to make your loan comfortable for you according to you lifestyle and other financial commitments. How you set you EMI determines how long your loan will last. Shorter tenures mean tighter budgets but quicker financial relief. Longer tenures ease the monthly pressure but extend the financial burden.

Before signing the loan agreement, consider checking the financial numbers. Also, test different scenarios using EMI calculators, and ask yourself these practcal questions:

“Can you pay more now to gain freedom sooner?”

“Is lower stress now worth higher costs later?”

This preparation would help you save money with a financially relaxed life!