10 Key Factors That Affect Your Personal Loan EMI

Personal loans are one of the most convenient financial options offered by banks and NBFCs to help borrowers meet their planned and unplanned financial needs. Whether the amount is used to cover medical expenses, for travel, home improvement, credit payments or managing short-term cash gaps, a personal loan offers quick access to funds without having to pledge collateral. 

Many people opt for a personal loan because it:

• Offers flexibility of usage
• Have a relatively quick approval and disbursal timeline
• Requires minimal documentation
• Comes with fixed monthly EMIs

EMI (Equated Monthly Instalment) payments are one of the important aspects of borrowing a loan that can impact your borrowing experience. It is a fixed amount payable each month until the loan is completely repaid. EMIs have two components:

• Principal Amount: This is the original borrowed amount.
• Interest Amount: This is the cost of borrowing a loan. The amount is charged as a small percentage of the principal amount. 

Your EMI is not just a monthly obligation; it directly impacts your cash flow, savings, and long-term financial stability. Understanding factors that affect personal loan EMI can help you borrow responsibly and plan your repayments with confidence. 

Factors Affecting Personal Loan EMI

Loan Amount

One of the primary factors that impacts personal loan EMI is the loan amount. The higher the loan amount you borrow, the higher the EMIs and the total interest over the loan tenure. Many borrowers apply for the maximum eligible amount instead of borrowing only what they need. Borrowing more than required can strain your monthly finances, as the monthly repayment increases. It’s wise to borrow only what is necessary to keep EMIs manageable and avoid unnecessary financial stress.

Loan Tenure

This is the duration over which the borrower needs to repay the loan (both principal and interest). This duration plays a critical role in how affordable your EMIs will be and the total cost of borrowing. While a longer tenure allows borrowers to stretch their payments over a longer duration, they end up paying more in the form of interest as compared to a shorter repayment tenure. Factors like income and existing obligations also influence this decision.

It is advised to figure out an optimum EMI plan for the shortest tenure possible to easily repay the borrowed loan and put aside some for a rainy day. While availing a personal loan from Muthoot Finance, you can use our personal loan EMI calculator to better plan EMIs that fit within your budget.

Credit Score

Credit or CIBIL score plays a decisive role in determining the loan terms offered to the borrower. A CIBIL score of 750 or higher is ideally considered healthy and is a clear indicator of financial stability, helping borrowers to secure lower interest rates. Lower interest rates allow borrowers to reduce their monthly instalment payments and offer flexible repayment terms. 

Job Stability

A stable job and regular income positively impact the borrower’s eligibility. Lenders prefer borrowers with stable employment or steady business income, as this reduces their lending risk. A steady job profile may also help you get more favourable loan terms, including competitive interest rates and flexible repayment options, thus resulting in better EMIs options.

Existing Debts and Loans

Your existing debts and financial obligations play an equally important role. Ongoing credit payments, EMIs for loans or dues reduce your disposable income. These obligations can impact your loan eligibility, interest rates and the loan amount offered.

Lenders may consider you as a high-risk borrower as they evaluate whether you will be able to repay on time or not. Managing current debts effectively improves your eligibility and allows you to manage your personal loan EMIs more efficiently. 

Interest Rates

The interest rate is another decisive factor that affects personal loan EMI. Even a small difference can substantially change the total repayment amount over the loan tenure. Interest rates are influenced by several factors, including the borrower’s CIBIL score, income, repayment potential, lender’s risk assessment and prevailing market conditions. Another factor that impacts your EMIs is the type of interest plan you choose:

• Fixed Rates: The interest remains the same throughout the loan tenure and does not impact the monthly payments.
• Floating Rates: These rates can fluctuate based on market conditions, RBI regulations and the lender’s policies. If floating rates increase, so does the personal loan EMI.

Comparing loan offers across lenders can help secure a more favourable rate.

Suggested Read: Major factors that affect Personal Loan interest Rates

Processing Fees and Hidden Charges

Apart from EMIs, borrowers should consider processing fees and other charges, such as GST and documentation costs. These costs add to the overall cost of borrowing and may significantly impact the effective EMIs. By factoring in these additional costs, you get a comprehensive understanding of the total loan amount.

Personal Commitments

Personal financial commitments, such as household expenses, insurance premiums, and lifestyle affect how comfortably you can repay your loan. Before borrowing a loan, a realistic assessment of monthly expenses can help you choose an EMI that does not disturb savings or prior financial commitments.

Lender’s Policies

Different lenders have different internal policies that influence their eligibility criteria, interest rates, tenure and repayment. These factors can impact EMI structure, prepayment terms and additional charges. Borrowers should carefully read the loan agreement to ensure transparency before borrowing. 

Part Payments and Full Payments

Many borrowers often ask, how can I reduce my personal loan EMI? The answer lies in making small additional part-prepayments along with their EMIs. Prepayments mean paying an additional amount every month on the agreed EMI. Making part-prepayments reduces the outstanding principal, which may lower EMI and reduce the outstanding loan balance. Full prepayment allows borrowers to close their loans early. 

Suggested Read: Step-by-Step Guide to Calculate EMI for a Personal Loan

At Muthoot Finance, our transparent process and customer-focused services support borrowers to apply for an Instant Personal loan that aligns with their financial needs without compromising their long-term financial well-being.