The highly versatile and flexible online personal loans are the answer to any kind of financial deficit one might face. With technological advancements, these are incredibly easy to apply for and receive. Fintech companies, for example, are armed with high-end technology that makes it possible to upload documents and carry out verification online. This has considerably reduced the time required to ascertain if a person is eligible for the personal loan or not. After verification, the amount is transferred to the applicant’s bank account in a matter of days if not hours.
Personal loans, however, are a slightly risky affair for lenders as they do not require any kind of collateral to be pledged. The loan recovery, in case of non-repayment, becomes difficult, and so these loans invariably carry a higher interest rate. The interest rate and the loan tenure are two highly important aspects that should be considered carefully while availing an instant personal loan. These two factors have a significant impact on the monthly payouts or EMI as it is called.
What is EMI and how is it calculated?
EMI stands for Equated Monthly Installment which as the term suggests is the amount that is paid to the lender by the borrower. The amount and the payment date are clearly mentioned in the loan agreement and there are penalties and late charges applied in case of non-compliance. The EMI amount is a fixed one and is a combination of the principal and the interest applied. This simply put means that though the amount paid each month is same, the principal and the interest keep varying.
Banks and other financial institutions make use of a basic formula to determine the same. The formula is – E = P x r x (1+r) ^n/ ((1+r) ^n – 1)
Here E stands for the EMI, P stands for the principal amount borrowed, r is the rate of interest applied and n is the tenure of the loan.
You can adjust the tenure so that the monthly amount is well within your repayment capacity. Banks take serious consideration of this aspect and prefer an appropriate income to debt ratio. While banks hesitate to give loans if this ratio is more than 40%, Fintechs like Qbera do consider a ratio of 50% for an unsecured loan.
Loans, in general, have become an integral part of life and you hardly find anyone who is not stressed about the EMI payments. However, smart thinking can help keep this stress to a minimum.
Here are some tips:
- Apply for a loan amount wisely, after considering your requirement. Do not borrow more just because you can.
- Try and maintain a relaxed income to debt ratio. More than 40% definitely means stressed household finances.
- Always do proper research before deciding on a lender. An ideal interest rate and tenure will go a long way in making your personal loan affordable. So, don’t shy away from looking at different lenders and their offers.
- Maintain a good CIBIL score. This is very important as it ensures that your application is accepted easily, and you get the additional power to negotiate your interest rate.
To conclude, personal loans are the best way to manage financial deficits but make sure to pay your EMIs on time every time. Each instance of late or missed payment is penalized and also causes your credit score to drop severaly.