Are you buying a smartphone, laptop, air conditioner or home furniture at low EMI? At present, this has become an easy option for many people. But in the long run, it can be heavy on your pocket. Many people assume that paying small EMIs for a long time will not put much burden on them. But very few people calculate that low EMI means that the borrower pays less money immediately, but in the long run he has to lose many benefits.
Paying smaller EMIs for a longer period means paying higher interest. Let us try to understand this with an example.
Suppose, you take a loan of Rs 10 lakh at an interest rate of 10 percent per annum.
Option 1: More EMI → less time
Time: 5 years
EMI: Rs 21,247
Total amount paid: Rs 12.75 lakh
Total Interest: Rs 2.75 lakh
Option 2: Less EMI → More tenure
Time: 10 years
EMI: Rs 13,215
Total amount paid: Rs 15.86 lakh
Total Interest: Rs 5.86 lakh
Now you can understand that in Option 2, even though your EMI reduces by about Rs 8,000 every month, your total interest more than doubles.
Interest on the loan is calculated on the principal amount remaining over time. As time progresses the principal amount gradually reduces. Interest continues to accrue for a long time. Overall you have to pay a lot of money. In simple words, lower EMI means less monthly burden, but the total cost of the loan is higher.
Especially in the case of home loans, which generally have a tenure of 15-25 years, borrowers have to pay much more than what is initially required to repay the principal amount borrowed from the bank. For example, let us try to understand from a home loan of Rs 50 lakh whose interest rate is 8.5 percent.
Option 1: Shorter tenure (15 years) → Higher EMI
EMI: Rs 49,000
Total Payment: 88 lakh rupees
Total Interest: 38 lakh rupees
Option 2: Longer tenure (25 years) → Lower EMI
EMI: Rs 40,000
Total Payment: Rs 1.20 crore
Total Interest: 70 lakh rupees
Long term loans may be beneficial in some cases. Long term loans are not a bad option altogether. This can help those people who face problems in cash flow. It works best when combined with better financial decisions, such as investing the money saved in property or stocks.
