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When you take out a loan be it for a home, car, education, or personal needs, you also need to focus on the responsibility of timely repaying the amount in instalments. But what exactly are loan instalments, and why are they so important in your financial journey? Let’s break it down in simple terms.
What is a loan instalment?
A loan instalment is a predetermined amount of money paid periodically to repay a loan. It includes both interest and principal amount and facilitates borrowers to make the payments in instalments instead of making a large single payment.
How do loan instalments work?
Loan instalments are designed to allow borrowers to settle loans systematically. The instalment differs depending on three variables: loan amount, rate of interest, and duration. The loan amount, also known as the principal, is borrowed at a rate of interest agreed upon, and the repayment duration is determined.
Types of loan instalments
Loan instalments can be of varying types based on the borrower’s requirement. The most prevalent one is Equated Monthly Instalments (EMIs), where the same amount is paid every month, paying both interest and principal amount in a pre-defined ratio. This format is extensively used in Personal Loans, Home Loans, and Auto Loans.
However, other methods provide adjustable instalment schemes, i.e. payments changing according to financial situations. Some examples include step-up loans, where EMIs increase gradually with time. Another example is step-down loans, where EMIs reduce with time. It is necessary to select the correct instalment pattern based on financial stability and repayment ability.
How to calculate loan instalments?
Loan payments, or EMIs, are determined by a generic formula that considers the loan amount, interest rate, and tenure.
Formula for calculating EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
- Where p = principal loan amount
- R = monthly interest rate
- N = loan tenure in months
A higher loan, higher rate, and shorter tenure mean increased EMI payments. A longer tenure lowers the EMI but raises the total interest paid in the long term.
Factors influencing loan instalments
· Loan amount:
Bigger loan amounts mean bigger instalments.
· Interest rate:
A higher rate will cause larger EMI payments.
· Loan tenure:
A longer tenure will lower the EMIs but increase the total interest paid.
· Type of interest:
Flat interest rates keep EMIs constant, while reducing balance rates lower EMIs over time.
Smart borrowing isn’t just about getting a loan – it’s about managing your instalments wisely to secure financial stability.
Why should you choose FIRSTmoney for your Personal Loan?
FIRSTmoney provides affordable and flexible loan instalments based on your requirements. At a competitive interest rate of 10.99% p.a., you can borrow from ₹ 50,000 to ₹ 10 lakhs and choose repayment tenure between 9 to 60 months. The process is 100% digital for instant approvals and disbursals. There are zero foreclosure charges, allowing you to repay ahead of time without any additional cost.
Conclusion
Effective management of loan instalments is the key to financial stability. By knowing how EMIs work, choosing the most suitable tenure, and selecting a repayment option that aligns with your income, you can lighten your debt burden. With FIRSTmoney, you get the flexibility to tailor your loan instalments to your needs, ensuring a hassle-free borrowing experience with affordable rates and transparent terms.
Disclaimer
The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.