Professional loans are a useful financial tool for individuals like doctors, chartered accountants, engineers, and lawyers who need funds to expand their practice or meet other professional needs.
While these loans offer flexibility, managing the Equated Monthly Instalments (EMIs) can sometimes become a concern. However, there are several strategies you can use to reduce your EMI burden. Here’s a guide on how you can achieve that.
1. Boost Your Credit Score
Your credit score plays a vital role in determining the interest rate on your professional loan. A high credit score demonstrates financial responsibility and makes you a low-risk borrower. Lenders tend to offer loans at lower interest rates to individuals with a strong credit score. Lower interest rates translate to lower EMIs.
How to improve your credit score?
- Pay your existing loan EMIs and credit card bills on time
- Avoid over-utilisation of your credit limit
- Check your credit report regularly to rectify any errors
By maintaining a credit score above 750, you increase your chances of securing a lower interest rate on your professional loan.
2. Opt for a Longer Tenure
If reducing your EMI amount is your priority, consider choosing a longer repayment tenure for your professional loan. The loan tenure has a direct impact on the EMI amount. The longer the tenure, the smaller the EMI, as the repayment is spread over a longer period.
If you borrow ₹5 Lakhs for 3 years at an interest rate of 12%, your EMI will be higher compared to borrowing the same amount for 5 years. The repayment amount remains the same, but spreading it over a longer tenure reduces the monthly burden.
While longer tenures reduce EMIs, they may result in higher overall interest costs. It is wise to assess your financial situation before opting for a longer repayment period.
3. Negotiate for a Lower Interest Rate
Negotiating a lower interest rate can directly impact your EMI. If you have a good relationship with your lender or have been a loyal customer, you may be able to negotiate a more favourable rate. Banks and financial institutions often value long-term relationships and may offer better terms to existing customers.
How to negotiate with your lender?
- Highlight your clean repayment history
- Provide proof of consistent income or improved financial status
- Consider taking multiple financial products (like a credit card or FD) from the same lender to leverage your relationship
If your lender refuses to lower the interest rate, you can consider refinancing or transferring your loan to another lender offering lower interest rates.
4. Make Prepayments on Your Loan
Prepaying your loan, even partially, can help reduce your EMI or shorten the loan tenure. Prepayment means paying an additional amount over and above your regular EMI. This reduces the principal balance, leading to lower interest payments in the future.
How prepayment works
If you receive a bonus, incentive, or lump-sum amount, consider using it to make a prepayment. Depending on the lender’s policy, you may have the option to reduce either the EMI or the tenure.
Benefits of prepayment
- Reduction in the principal balance
- Possibility to lower the EMI or shorten the tenure
Tip: Check if your lender charges any prepayment fees. Some lenders have a lock-in period before you can make prepayments, while others may levy a small penalty.
5. Use a Professional Loan EMI Calculator
Before opting for any of these methods, it’s essential to analyse how each change will impact your EMI. This is where a professional loan EMI calculator can be helpful. It allows you to calculate your EMIs based on different tenures, interest rates, and prepayments.
How to use the EMI calculator?
- Enter the loan amount, interest rate, and tenure
- If you’re considering prepayment, enter the prepayment amount and its timing
- Instantly see how your EMI changes and decide on the best course of action
This tool provides a clear picture of how each option impacts your repayment schedule and helps you make informed financial decisions.
Other Tips to Reduce Your EMI
Refinance Your Loan
If your existing lender is not offering a lower rate, consider transferring your professional loan to a lender offering better terms
Avoid Missed Payments
Late payments attract penalties, impacting your ability to negotiate better rates in the future
Borrow Smartly
When taking a professional loan, choose the lender offering the most competitive interest rates and flexible repayment terms
Conclusion
Reducing EMIs on a professional loan can free up cash flow and ease your financial burden. By boosting your credit score, opting for a longer tenure, negotiating better interest rates, and making prepayments, you can reduce your EMI significantly.
Disclaimer: No Business Standard Journalist was involved in creation of this content