5 factors that influence your personal loan EMI — know them before borrowing

Personal loans continue to remain a popular financing option in the country. These loans help meet indispensable needs, such as medical expenses, travel, or debt consolidation. Still, before applying, borrowers must clearly acknowledge and understand what determines their personal loan EMI, i.e., equated monthly instalments.

Keep in mind that an individual's loan EMI has a direct impact on their monthly cash flow. Personal loans, on a fundamental level, are unsecured in nature; that means, unlike secured loans such as home loans or gold loans, personal loans don’t require borrowers to pledge any assets or collateral.

Atul Monga, CEO& Co-Founder, BASIC Home Loan, adds to this, stating, “Unlike home loans, which are secured and offer lower interest rates and longer tenures, personal loans are unsecured and hence priced higher due to increased lender risk. Several factors influence personal loan EMIs, including the borrower's credit score, credit history, income stability, loan amount and tenure."

Monga pointed out that opting for a shorter tenure loan can lead to higher EMIs, but it will also lower the overall interest outgo. "On the other hand, a longer tenure will reduce the monthly loan burden but add to the overall loan cost. Lender-specific risk assessment, interest rate cycles and market liquidity conditions also play a role in determining personal loan EMIs,” he added.

Keeping the above observations in mind, here are five key factors that influence your personal loan EMI and should be evaluated diligently by aspiring borrowers before going ahead with any particular personal loan product.

Five key factors that influence your personal loan EMI

1. Loan amount: The higher the loan amount, the greater is EMI burden. That is why borrowing should not be reckless. It should be planned efficiently. You should borrow only what you genuinely need to avoid incurring unnecessary interest.
2. Interest rate: The applicable interest rates on personal loans in the country generally vary based on the borrower’s credit profile, repayment potential, and credit score. Furthermore, even a 1-1.5% difference in interest rate can significantly influence your EMI over the entire loan tenure.
3. Loan tenure: Planning the loan repayment tenure is another critical factor. Longer tenures lower EMIs but increase the total interest paid. Whereas shorter tenures raise EMIs but help in saving on interest costs. That is why loan tenures must be planned in accordance with one’s current financial health and repayment capacity.
4. Credit score and income stability: A high credit score, i.e., a score of 750 or higher, is a clear indicator of financial stability. It is considered a healthy score and helps aspiring borrowers in securing lower interest rates. Stability in monthly income and a solid employment history also play a vital role in EMI calculation.
5. Processing fees and additional charges: When you apply for a new personal loan, processing fees, GST, and other associated charges are added to the effective loan cost. Although these may not directly affect the monthly EMI, they still impact the overall affordability of the loan.

Why is EMI planning important?

A well-calculated personal loan EMI ensures that repayment continues to remain manageable, stress-free and never strains one’s monthly budget.

Furthermore, as a sensible borrower, you can also use personal loan EMI calculators provided on the official websites of leading banks and financial institutions. These tools can help you compare offers from various lending institutions and select the most cost-effective and easily manageable option.

Risks to consider before taking a personal loan

Given that personal loans offer borrowers quick access to funds, they still come with associated risks. High interest rates can result in a heavy repayment burden, especially if income becomes unstable.

Furthermore, missing EMI due dates can attract serious financial penalties, interest charges, and, in extreme cases, legal action. It can also negatively impact one’s creditworthiness and credit score. Additionally, frequent borrowing through personal loans may result in a debt trap if not planned diligently. That is why aspiring borrowers should carefully analyse their repayment potential before committing to any particular personal loan product and should consult a certified financial advisor before proceeding with any loan product.

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