Buying products on low-cost EMIs? Here's how it can burn a bigger hole in your pocket in long run
Lower EMIs mean paying less immediately but losing much in the long run. Here we explain how.
Buying smartphones, laptops, air conditioners, or home furniture on low-cost EMIs? This may seem like an easy option to many, but in the long run, it could burn a big hole in your pockets.
Many people assume that paying a small EMI over a longer period wouldn't put much of a burden on their shoulders. But not many calculate that lower EMIs mean the borrower pays less immediately but loses many benefits in the long run.
The maths behind EMIs
Paying small EMIs for a long period means paying more interest. I asked ChatGPT to explain this with an example. Here's what it said:
Let’s say you take a loan of ₹10 lakh at 10 per cent annual interest.
Option 1: Higher EMI, shorter tenure
Tenure: 5 years
EMI: ~ ₹21,247
Total paid: ~ ₹12.75 lakh
Total interest: ~ ₹2.75 lakh
Option 2: Lower EMI, longer tenure
Tenure: 10 years
EMI: ~ ₹13,215
Total paid: ~ ₹15.86 lakh
Total interest: ~ ₹5.86 lakh
So, what’s happening here?
In Option 2, although your EMI drops by about ₹8,000/month, your total interest more than doubles
Why does this happen?
Interest in loans is calculated on the outstanding principal over time. When tenure increases:
1. Principal reduces more slowly
2. Interest keeps getting charged for longer
3. You end up paying much more overall
4. Simple takeaway
5. Lower EMI = easier monthly burden but higher total cost of the loan
Especially, in the case of home loans, which usually have lengthy terms of around 15-25 years, borrowers end up paying substantially more than was initially required to repay the principal borrowed from the bank.
Example: Home Loan ₹50 lakh @ 8.5% interest
Option 1: Shorter tenure (15 years) → Higher EMI
EMI: ~ ₹49,000
Total paid: ~ ₹88 lakh
Total interest: ~ ₹38 lakh
Option 2: Longer tenure (25 years) → Lower EMI
EMI: ~ ₹40,000
Total paid: ~ ₹1.20 crore
Total interest: ~ ₹70 lakh
Long-term loans may benefit in some cases
Long-term loans are not a bad choice altogether. It could help people who experience cash flow difficulties. It works best when combined with better financial decisions, such as investing the saved money in property or stocks.
The bottom line
The best option isn’t about choosing a low or high EMI but about not staying in debt longer than necessary.
Disclaimer: This story is for educational purposes only. We advise readers to check with certified experts before making any decisions.
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