Personal loans have often been considered one of the most helpful sources of emergency funds. These loans can be used for a variety of purposes. However, taking out such a loan can be a significant financial decision as it involves repaying it in Monthly Equated Instalments (EMIs). Without proper financial planning and future outlook, these EMIs can often become too heavy a burden to bear each month. However, there is a way to properly plan for such EMIs so that you can seamlessly pay them without having to undergo a financial crunch.
Understanding the Role of EMI in Loan Planning
You can manage your EMIs better by planning properly before taking a personal loan. To do this, you need to understand the role of EMI and the personal loan interest rate. The Equated Monthly Instalments (EMIs) you have to pay each month include both the principal (i.e., the loan amount) and the monthly interest levied by the lending institution.
Therefore, it is quintessential to plan how to pay these EMIs before taking the personal loan. Without this financial planning, you may need another loan to repay the existing one, which could lead to a debt trap.
Here is a step-by-step process of financial planning using an EMI calculator before taking a personal loan.
. Accurate Financial Forecasting
Using an online calculator to estimate the EMI before taking a loan can help with accurate financial forecasting. You simply need to enter the loan amount, the interest rate charged by the lending institution, and the tenure for which you wish to repay the loan. This will give you an accurate estimate of the EMI you need to pay each month.
. Comparison of Loan Offers
Using an EMI calculator, you can also compare loan offers from several lending institutions, such as banks and non-banking financial companies (NBFCs). By comparing the EMI amounts for different loan offers, you can cross-check these with your monthly budget and potential income in the coming years (preferably throughout the loan tenure). This can ensure that you always have the required funds to pay the EMIs without fail and maintain a good credit history.
. Flexibility in Loan Planning
Sometimes, the personal loan interest rate can be higher than other loans, such as housing or vehicle loans. You can use an online calculator to calculate EMIs for different loan tenures in such cases. The longer the loan tenure, the lower the monthly EMI will be. This can help balance out the higher interest rate. This can help you experiment with different EMI amounts and give you a certain degree of flexibility in loan planning.
. Better Budget Management
Using an online EMI calculator to determine the monthly EMI burden beforehand can also help you manage your monthly budget efficiently. If you know how much EMI you must pay each month before even taking the personal loan, you can inculcate the habit of saving up that amount each month. This can ensure your liquidity is unaffected while helping you adhere to your monthly budget.
. Boosts Application Confidence
Finally, using such a calculator to check your potential EMI amounts before taking a personal loan can also boost your confidence in applying for the loan. Suppose you are confident that the EMIs are within your monthly budget, even with high personal loan interest rates. In that case, this can give you financial security and confidence to apply for a loan. As a result, the lending institution may also have more confidence in your financial acumen to repay the loan, making the approval process faster.
Conclusion
Using an EMI calculator effectively, you can accurately forecast the EMI amount and take steps to tidy up your finances so that you can pay this amount each month. This planning can even help you tide over higher personal loan interest rates and make repaying EMIs much easier.