How Can You Reduce Personal Loan EMI and Save Money?

A personal loan can help you in many situations, like paying for a wedding, handling a medical emergency, renovating your home, or funding education. It gives quick access to money without needing to provide any security like property or gold.

But personal loans often come with high interest rates, and repaying them every month through EMIs (Equated Monthly Instalments) can become stressful. The good news is there are smart ways to reduce your EMI and make your loan easier to manage.

Here are 6 simple and effective tips to reduce your personal loan EMI:

1. Borrow Only What You Really Need:

It's easy to borrow more money when loan offers appear online or on apps, but borrowing more than you need will raise your EMI, interest, and financial stress. To keep your EMIs low and manageable, only borrow the amount you truly need.

Avoid taking extra funds just because they're available, as this will increase your loan and monthly payments unnecessarily. Borrowing wisely helps you keep EMIs affordable and manage your finances better.

2. Choose a Suitable Loan Tenure:

Loan tenure refers to the number of months or years you take to repay your personal loan, and it plays a major role in determining your EMI. A longer tenure can lower your monthly EMI, making repayments more manageable, but it also means you'll end up paying more interest over time.

On the other hand, a shorter tenure increases your EMI but reduces the total interest cost. To strike the right balance, choose a loan tenure that fits your monthly income comfortably. Avoid extending the tenure too much just to reduce EMI, as it can lead to higher overall repayment.

3. Make Prepayments Whenever You Can:

If you receive extra money, such as a bonus, tax refund, or profit from investments, consider using some of it to pay off a part of your personal loan early. This is known as prepayment. It helps reduce the main loan amount (called the principal), which in turn lowers the total interest you have to pay and may reduce the number of EMIs.

"To save more on interest, it's better to reduce your loan tenure rather than the EMI. However, make sure that making a prepayment doesn't affect your emergency savings or other important financial goals. Also, check with your lender about any prepayment charges, as some banks may charge a fee of 1-3% of the prepaid amount," suggests Financial Planner, Navneet Dhawan.

4. Increase Your EMI When Your Income Grows:

If you get a salary increase or start earning more from your business, it's a good idea to increase your EMI amount. Paying a higher EMI helps you repay the loan faster, which shortens the loan tenure and reduces the total interest you pay.

However, "make sure that increasing your EMI doesn't affect your regular monthly expenses or savings. Ideally, your total EMIs should not exceed 50-60% of your monthly income to keep your finances stable," said Financial Planner, Navneet Dhawan.

5. Transfer Your Loan to a New Lender (Balance Transfer)

If another lender offers a lower interest rate than your current one, you can move your loan to them through a personal loan balance transfer. This helps reduce your EMI or allows you to repay the loan faster. Some lenders may also offer extra funds through a top-up loan.

For example, if you're paying 15% interest and a new lender offers 11%, you can save a lot over time. Before transferring, compare fees and charges, make sure the savings are worth it, and check your credit score-having a good score can help you get better terms.

6. Combine Multiple Loans into One (Debt Consolidation)

If you have EMIs on several loans like credit cards or payday loans, managing them can be tough. You can simplify this by combining all your loans into one personal loan with a lower interest rate, called debt consolidation.

This means you pay just one EMI, often at a lower rate, making it easier to handle your monthly budget and lowering the chance of missing payments. Just make sure the new loan has better terms than your current ones for it to be helpful.

Here are some bonus tips suggested by Nikhil Kothari, Director of Etica Wealth to help you manage your personal loan better.

• Choose a fixed interest rate if you want your EMI to stay the same every month, since floating rates can go up and increase your EMI.
• Always read all the loan terms carefully and watch out for hidden charges like processing fees, late payment penalties, and cheque bounce fees, as these can add to your costs.
• Lastly, don't settle for the first loan offer-compare different lenders' interest rates, customer service, loan terms, and prepayment options before making a decision.