Nowadays almost anything can be bought using EMI, an acronym for Equated Monthly Payment. This means that the total loan amount has to be paid in monthly installments.
This sometimes helps as the total cost of whatever you want to buy may not be available as a one-time payment option. Often, you may be able to get an EMI on debit card, SBI is one bank which offers options like this.
But before you decide there are a few things you need to think about. It is essential that you carefully study the following tips before you jump into it and ran into a financial crisis
Think Before You Leap:
- First off, is the thing you want to buy essential, that is to say, you can’t do without it. If yes, then the first point to think about is whether you can afford it. The best way is to see what this EMI works out to.
That is to say, does it exceed 50% of your salary or monthly income? If it does, it is perhaps not a good idea. If there are other existing EMI’s or loans which need to be paid every month, all the installments need to be added together to check whether they exceed this 50% limit.
If they already do, then the new purchase is risky and should be avoided, until one of the loans /EMI’s, is paid off. However, if there are no other loans, EMI’s, then it remains to be seen whether the EMI which is now being contemplated is below the 50% of salary barrier. If it’s below this safety limit, then it’s time to look at the terms offered by various banks.
- The first thing to do is to go on the Internet and check out the various options available from multiple banks and financial institutions. Check to see who is offering a better interest rate or easier repayment terms.
Once this research is done approach the institution you think has the deal and then talk to them. Bargain with them for a better interest rate.
Get An Idea Of Your Credit Score:
- It is a good idea to get a CIBIL score by paying a small fee. A good credit rating helps in getting a better deal from banks. Take this rating with you when you speak to them. A better interest rate might be the result.
Managing Monthly Outlay:
- Once the EMI is calculated, apply the 50% limit rule. If the EMI is above this, then increase the term of repayment to bring the EMI down. This will, of course, add to the interest component of the loan, but will prevent you from defaulting, or getting into a financial stress situation.
Some events cannot be predicted and might adversely affect your income, sudden and unseen expenses sometimes occur, so a smaller EMI might be a good idea. Also, try and make as large a down payment as is financially feasible.
This will reduce the amount of loan repayment and lower interest, as well as reduce the EMI payable every month. Also, if you choose the option of EMI on debit card, SBI bank has tie-ups with numerous merchants which offer less interest on your purchase, thereby reducing the quantum of payment as well.
- Check to see if the bank will accept early repayment, and if so, how much of the interest they would return.
Since the installments contain the interest component, an early repayment means that the bank is getting its money back earlier and therefore they will give back some of the interest. Sometimes banks charge a prepayment amount. Check to see how much it is.
Budgeting For Repayment:
- Make sure you budget for the installment every month. A failed installment (EMI) means penalty charges and a reduction in the CIBIL score. You will end up paying extra just because you missed that payment. So try and not let that happen.
If you have taken an EMI against a credit card, this repayment is a must.
Otherwise, you end up paying usurious rates of interest against the amount outstanding. This can be financially draining, so keep that in mind. Credit card dues can increase rapidly due to high-interest rates, compounded. To be avoided at all costs.
Overall, the important thing is to be careful. If the proposed purchase is an asset, then it is ok to go ahead. But once you take the loan and buy, you have a monthly liability, whether you can eat or not. That’s the thing to keep in mind.
Personal loans are easy to get, and banks encourage people to take them. The end-use for such loans is never asked. But the rates of interest charged, because of the no security taken factor are high and can seriously affect the amount of repayment. One has to think carefully about whether the investment is worth the total refund.
A default will add substantially to this loan cost. And continued default for any reason will create a financial mess. Therefore before taking a loan based on EMI, financial factors have to be considered seriously. Is the income every month enough to pay it, is the income steady or fluctuating, is there a buffer cash amount which can be used in case there is a drop in the monthly income!
In case a sum of money comes in, it is wiser to pay this and reduce debt. That’s to say, make a prepayment and lessen the outstanding.