An EMI or an Equated Monthly Installment will never be the same amount until the end of the loan tenure. There are many factors that an affect the amount that you pay towards the loan. There are 4 such factors that can highly impact your EMI. They are as follows;
Change in the Rate of Interest:
Your interest rate can change many times during the entire tenure of the loan. Yes, this can impact you in both; positive and negative ways. If the interest rate increases, you will have to pay more EMI’s and if the interest rate reduces, that would lower your EMI.
There are two types of interest rates; fixed and floating. If you have a fixed rate of interest on your loan, then changes in the bank rates will not affect your interest rates. If you have a floating rate of interest on your loan then the EMI will keep changing whenever the RBI changes the rates.
Prepayment of the loan:
Usually you can prepay lump sum amounts to close the loan. Every Bank/NBFC has a provision for extra payments made over and above the monthly EMI’s. Some Banks/NBFC’s will allow you to pre pay but they will levy 1-3%* charge for prepaying.
Yes, you need to be cautious and hence find out about pre payment charges before taking a loan. Banks might waive off these charges in case you are paying off using your own sources (bonus, VRS, Income from investments etc.) But if you take a loan from another lender to prepay this loan, they can increase the prepayment charges.
Change in Loan Tenure:
When you begin negotiating your loan tenure with your current lender or if you have decided to switch to a new lender with a new tenure, there will be a change in EMI. Yes, if that tenure is long, then you will be paying less EMI. If the tenure is short then you will end up paying more EMI. The benefit of short tenure is that you can repay the loan faster. The benefit of a longer tenure is that you can pay lesser EMI that reduces the burden off you. The only minus point being that you will end up paying more than that of a short tenure loan.
Flexible Repayment Options:
You can find out about flexible repayment options that your Bank/NBFC provides. Banks provide step up and step down options. In step up, you will pay lower EMI’s and as the tenure reaches the end, you pay higher EMI’s. This is better for those who take a home loan early in their career. In step down, you will pay higher EMI’s and as the tenure reaches the end, you pay lesser EMI’s. This is better for those nearing retirement.