If an individual is not smart about his choices, he will spend half of his life with burdens and regrets. In the same way, if a borrower does not make a smart financial choice, he will spend his life paying off EMIs on different loans. If the borrower does not work on his financial planning carefully, the EMIs he needs to pay will affect his monthly budget drastically and make his life a bit harder.
Due to the lack of knowledge, people often take loans without understanding the loan agreements. And this is what usually leads to bad decisions and poor choices, which can affect an individual’s finances for a lifetime.
The money will get you your dream car, a beautiful house, or even quality education. Hence, people take loans or buy these dreams on EMI basis. However, both these options are credits and hence, to avoid massive financial burden in the future, it is important to manage loans and EMIs very crucially.
Among the basic dreams that people have, owning a house is probably the most sought after. Everyone wishes to own a beautiful house in a perfect location, where they can spend their life peacefully.
Considering this dream, and thus keeping a home loan as the basis, let us understand a smart way to reduce your financial burden by learning how you can reduce EMIs, interest rates or even, prepay your loans.
Home loans are easily available in the market, usually have higher interest rates, and their EMIs are based on the borrower’s tenure.
How to reduce home loan EMIs or Interest Rates?
There are several ways and techniques to help you reduce your EMIs and the interest rate of your home loan. These techniques are for borrowers who are going to take a loan for the first time or have already taken one.
Let’s understand them collectively and see how different borrowers (first time, existing) can reduce their EMIs, and interest rates.
First Time Home Loan Borrower
If a borrower is going to take a home loan for the first time and wishes to reduce his monthly EMIs, they should visit all available lenders and select the one which is offering the loan with a lower interest rate.
However, choosing the right home loan lender might be difficult for a new borrower. Here are some tips that can help a borrower to select the right home loan lender:
Compare Interest Rates Online
A borrower who wishes to take home loans should check the interest rates, fees, or other charges attached with each home loan lender.
Many online websites can help the borrower to compare the different lenders and their rates online, and it will become easier for the borrower to select the right lender.
Choosing a Longer Repayment Tenure of the Loan
A longer repayment tenure means lower EMIs for the home loan. A borrower should only choose a longer tenure if he cannot afford to pay higher EMIs. This is because a longer tenure means that the borrower needs to pay a higher interest rate on his home loan outstanding amount.
The borrower should calculate the tenure and corresponding interest rate on the home loan and should then opt for the home loan.
The borrower should try to maximize his EMIs only if he is comfortable to pay more. This is why a borrower should choose their home loan lender and tenure carefully as this will impact the amount of EMI the borrower will have to pay.
When the borrower gets an increment in his salary or gets a bonus, he should use that extra money to pay the home loan EMIs, which will reduce the loan tenure over the years.
Source: Finology EMI Calculator
Source: EMI Calculator
Start with a Bigger Down Payment
Home loan lenders are allowed to finance up to 80-90% of the amount to the borrowers, and borrowers should not focus on arranging the minimum amount of 10-20% as a downpayment.
Instead of focusing on the minimum down payment, the borrower should try to contribute the maximum amount from his pocket.
The higher the amount the borrower contributes as a down payment, the lower LTV( Loan to value ratio, which means the ratio of loan to the value of the property purchased) ratio will be.
Contributing the maximum amount from your pocket will increase the chances of loan approval. However, it is not advisable to not overstretch your finances just to pay the maximum amount.
Existing Home Loan Borrowers
If you have already taken a home loan and are looking to reduce your interest rates and EMIs, here are some strategies that can be adopted to reduce the EMIs and interest rates.
Refinancing the Loan
If a borrower has taken the home loan at a higher interest rate, there is an option through which they can refinance their home loan by changing the home loan lender.
Usually, banks offer loans based on MCLR (Marginal Cost of Fund Based Lending Rate, keeping the tax and conversion fee in mind) that allow borrowers to switch from one lender to another one which offers home loans at a lower interest rate.
Switching from one bank to another bank changes the prefixed date and tenure of the home loan as the borrower will pay a lower interest rate.
Negotiation with the Existing Lender
If the borrower has a good relationship with the home loan lender, then the borrower can negotiate service terms with the lender. This might help borrowers to a reduction in the interest rate.
Prepayment of the Home Loan
When a borrower prepays the amount of his regular EMIs in advance, it is called the “Prepayment of the loan”. This option of prepayment is ideal for both new as well as existing borrowers as it can reduce their EMIs and interest rates.
If a borrower has some bonus money in their bank account, they can prepay their home loan before the end of its tenure. By making prepayments, a borrower can reduce the overall interest payments. The borrower may get this bonus amount from the annual bonus salary, any maturity investments, etc.
Prepaying some amount of the loan will reduce its total outstanding amount and the total interest that needs to be paid. Generally, lenders allow borrowers to make the prepayment in either part or full.
Let’s take a look at them:
When borrowers use lump-sum amounts to make a prepayment for one time of home loan before the tenure ends, it is called a lump-sum prepayment. It may be the amount received as a bonus, the maturity of the borrower’s old investments, or the amount received as a gift, etc.
Top-up EMI Prepayment
Increasing the EMI amount by a certain amount on a yearly basis is called top-up EMI prepayment. Increasing the EMI amount yearly will reduce the tenure, interest rate, and EMIs too.
It is a good option for those who are not able to make all the prepayment at once.
By following these steps, borrowers can make a smarter decision before applying for any type of loan. A well-informed and smarter financial decision can help the borrower to end their EMIs sooner with a lower interest rate.
Do not take unnecessary home loan amounts when you can contribute the maximum amount from your pocket. It will affect your EMIs and your pocket too.
Before selecting the home loan lender, it is advisable to do some research and choose the one who is offering the home loan at a lower cost and can save some of your money.
In the end, just like every other thing, having prior knowledge will help the borrower to make better and smarter decisions.