7 Factors that Affect Your Personal Loan EMI

Whether it is saving for the future, covering emergency expenses, or making a big-ticket purchase, sound financial planning often revolves around making the right decisions at the right time. Taking a personal loan can be one of those decisions. A personal loan allows you to spread both planned and unforeseen expenses over a feasible period, eliminating the upfront cost burden of paying for a big-ticket expense.

But before you apply for a loan, you must understand the personal loan EMI (equated monthly instalment) obligation that comes with it. Depending on several factors, your EMI amount can range from manageable to unsustainable. To ensure financial stability and favourable loan terms, read on to learn about the top 7 factors that influence your EMIs.

1. Tenure

Your EMIs are directly tied to the loan tenure – the duration over which you will repay the loan. A longer tenure yields lower EMIs but calls for a higher total interest payment, while a shorter tenure leads to higher EMIs but a lower total interest payout. It’s crucial to balance the two to ensure that EMIs remain feasible but don’t increase your overall interest payout by a huge margin. You can use a personal loan EMI calculator to arrive at a comfortable tenure based on your financial situation.

2. Credit Score

A high credit score can be a gateway to securing a personal loan at affordable interest rates. Lenders perceive borrowers with good credit scores as safe and trustworthy, which often translates to lower interest rates and EMIs.

Pay bills on time, reduce existing debt, and avoid multiple open lines of credit to improve your score. Additionally, regularly monitor your credit report for inaccuracies and address any discrepancies promptly to maintain your credit rating.  

3. Monthly Income

Your income is a key factor that lenders consider when determining your loan eligibility and interest rates. A higher income can qualify you for potentially better interest rates, reducing your personal loan EMI burden. It's important to have a stable income to ensure you can manage the monthly repayments comfortably.

4. Debt

Lenders evaluate your existing debt to assess your ability to manage additional financial obligations. A high debt-to-income (DTI) ratio may result in a higher interest rate or a lower loan amount, both of which can affect your EMI. Also, applying for a loan with a high DTI can negatively impact your credit score. So, bring down your outstanding debt before applying for a personal loan to increase your chances of securing favourable loan terms.

5. Type of Interest Rate

The type of interest rate - fixed or floating - can affect your EMIs. A fixed interest rate ensures a steady EMI throughout the loan tenure, ensuring predictability in monthly outflows. On the other hand, a floating interest is tied to market fluctuations and can lead to varying EMI amounts.

While a fixed rate provides stability, a floating rate might offer lower interest rates if market conditions are favourable. So, choose an interest rate profile that aligns with your financial circumstances and risk tolerance. You can find a personal loan EMI calculator online and check your EMI obligations in different scenarios.

6. Reputation of Your Employer

Since personal loans are typically unsecured, lenders thoroughly scrutinise various factors of your financial profile to assess your creditworthiness, including your employment history and current employer. Borrowers employed by reputed organisations are often perceived as more financially solvent. As a result, lenders may provide relaxed lending terms, including lower interest rates and EMIs.

7. Relationship with the Lender

Having a positive, long-term relationship with your lender can be beneficial when applying for a personal loan. Lenders may offer better terms, including lower interest rates and EMIs to loyal customers with a good repayment history. It's advisable to maintain a good relationship with your lender, as it can provide leverage in negotiating better loan terms, ultimately resulting in more manageable personal loan EMIs.

Wrapping Up

Understanding the factors affecting your EMIs is key to making wise decisions with your personal loan. Eventually, the right type of interest rate, a high credit score, good debt management, and the correct tenure can help you manage your EMIs more easily. You could take the help of a personal loan EMI calculator online to figure out your outlay better and make the right choice.