Common EMI Mistakes to Avoid

Loans are a boon in times of financial crisis. When you take a loan, it is understood that this amount will have to be repaid in the form of EMIs or equated monthly installments.

This is a fixed amount of money you pay every month to your lender until the loan is repaid. The EMI amount is based on the principal amount, the rate of interest imposed, and the loan tenure.

Suggested Read: How to Calculate your Personal Loan EMI

While repaying a loan through EMIs is easier than paying the loan amount in full, there are a few mistakes borrowers make that can cost them dearly. It is important to note that delaying your EMI payments can cause your credit score to drop.

Here are some common EMI mistakes that most individuals make and how you can avoid them.

1. Not Budgeting for EMIs

Budget for EMI

EMIs should be an essential part of your budget. Only avail a loan if you can afford to repay it as missing your EMI payments will only cause your credit score to fall. 

While planning your budget, mandatorily include the amount you need to pay as EMI and plan out other expenses around that.

2. Choosing the Wrong Due Date

choose the correct due date

Most lenders require you to enable an auto-debit facility so that there are no delays in your payments.

However, if you choose the wrong date for the EMI to be auto-debited, you may end up missing your payment. For eg. if you receive your salary on the 10th of every month but your EMI auto-debit is scheduled for the 5th, you may miss your payment unless you have enough in your account to cover the EMI.

3. Opting for a Longer Loan Tenure

Opt for a shorter repayment term

One of the most common mistakes individuals make while availing a loan is choosing a longer repayment term. While this does reduce your monthly EMI, the amount you pay in interest will be much higher.

Let us understand this with an example.

Ajay took a loan of Rs. 50,000 at an interest rate of 16% per annum. The tenure he chose was 12 months. His monthly EMI in this case is Rs. 4,537.

The total amount of interest to be paid is Rs. 4,439 making his total repayment amount Rs. 54,439.

Virat, on the other hand, took the same amount of loan at a similar interest rate but the repayment term he chose was 24 months. His monthly EMI is Rs. 2,448.

However, the amount he ends up paying as interest is Rs. 8,756 making his total repayment amount Rs. 58,756.

4. Taking Too Much Loan

Opting for a Larger Loan Amount

Loans are always handy when we need financial assistance. But you must remember that loans are always meant to be repaid along with interest. No matter how helpful, they will have an impact on your finances especially if you are unable to repay them. Therefore, take an amount that you can comfortably repay.

Always avail loans only when you need them and when you are sure of your repayment ability. Do not take a large loan just because it is offered to you.

5. Ignoring Hidden Fees and Charges

Don't ignore the fine print

Another mistake most individuals make is not reading the terms and conditions thoroughly.

All lenders charge a certain amount of fee in addition to the interest, for e.g.. processing charges. There may also be other hidden charges such as convenience fees. It is therefore, important to go through the loan agreement carefully before signing.

In Conclusion

A loan can be incredibly helpful in many cases. However, there are certain common mistakes borrowers make while repaying their loans through EMIs. Always remember to read all the terms and conditions and choose a shorter repayment term. 

Additionally, do not take a large loan if you cannot repay it and remember to factor in your EMIs into your budget.

Do you have other tips to ensure that EMIs repayments go smoothly? Let us know in the comments below.