Understanding Your Personal Loan Parameters

With many loan options available, it takes time to navigate your way through the most suitable loan. Read to understand personal loan parameters in detail at IIFL Finance.

19 Dec,2022 12:46 IST 1590 Views
Understanding Your Personal Loan Parameters

The credit system in India has made life easier for the careful ones, while it is unfavourable for the greedy and careless ones. Initially, taking a loan can be intimidating. With many varieties of loans available, and jargon related to one loan, it can take time to navigate your way through the best suitable loan for yourself. This article highlights all the personal loan parameters.

What Is A Personal Loan?

A personal loan is money borrowed from a lender that you can use to pay off debt, finance a major purchase such as a car or boat, or cover significant expenses such as a wedding or vacation. The possibilities with a personal loan are endless.

Loans are available from online lenders, local banks, and credit unions. You can opt for any institution based on your cost-benefit analysis. However, once you select the lender, you must make payments until the debt is paid off. Personal loans offer fixed interest rates and repayment terms.

What Is An EMI?

An Equal Monthly Installment (EMI) is a fixed monthly payment made by the borrower to the creditor on a specified date each month. EMI applies monthly to both interest and principal, and the loan is paid off in full over several years.

A flexible payment arrangement where the borrower can choose to pay a higher amount. Through an EMI program, the borrower is allowed one payment per month. They benefit from EMI because they know exactly how much money they need to spend on their monthly loans. It facilitates personal financial planning. Lenders benefit from lending rates because they provide a consistent and predictable income stream.

What Is The Principal and Interest Rate Ratio In EMI?

If EMI is a constant, does that mean we pay back the principal and split the interest evenly? The table of amortisation provided by the bank at the beginning of loan repayment helps to see how the principal and interest components are combined in EMI.

In the early stages, the exciting part of EMI is much higher than the central part of EMI. The last few years of the loan term are the opposite. So if you think you've paid off 50% of your outstanding loan amount on a 10-year loan, look back at your amortisation chart to ensure you still need to pay it off.

What Is Loan Repayment Tenure?

The term of the loan is the period from when the loan is paid off until the final EMI payment. For example, if the personal loan was paid off on 01/01/2022 and paid off in full on 01/01/2025 (the last EMI payment), the loan term is three years. The shortest personal loan term is about two years, while the longest is about five years. However, remember that a personal loan minimum and maximum duration may vary from lender to lender.

What Is The Relationship Between EMI and Loan Tenure?

Consider the example of paying a car loan in 3 years versus 5 years at the same interest rate. You can pay off the loan in 5 years with a lower amount per month or pay off the loan in 3 years with higher monthly installments. In short, EMI is inversely proportional to loan tenure. Higher the loan tenure, the lower the EMI. However, the interest rate can be higher.

What Is The Interest Factor In Loan Repayment Tenure?

Longer maturities lead to higher interest payments than shorter maturities and vice versa. Therefore, before taking a loan, calculate the total cost of interest you will pay at the end of the loan term. It is usually helpful when you have to choose between two loan offers.

Understanding the cost of borrowing, considering total interest expense, processing fees, and other fees incorporated into the loan offer, will help you make the right lending decisions.

Avail Of A Personal Loan From IIFL Finance

IIFL Finance provides safe, quick, and hassle-free loans at affordable rates. The loan processes are swift, with minimal paperwork and instant transfers. With IIFL Finance, you get the best interest rates and flexible repayment schedules.

Avail of the benefits and apply for a personal loan with IIFL Finance today!

Frequently Asked Questions

Q.1: What is the prepayment factor?
Ans. Prepaying shortens the life of the loan, thus lowering your overall interest expense. Regular advance payments shorten the repayment period and reduce the total loan interest. Some lenders may impose penalty charges on prepayment.

Q.2: Is a credit score necessary for a personal loan?
Ans: Since a personal loan is an unsecured loan, credit score plays a significant role in determining your personal loan amount, personal loan interest rate, tenure, and terms. A credit score of 750 and above is a safe spot to avail of credit at your terms.

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