Reduce Tenure vs EMI

Reduce Tenure vs EMI

Reducing tenure and reducing EMI are two different approaches to managing loan repayments. Here’s a comparison between the two:

Reduce Tenure:

  • When you choose to reduce the loan tenure, you aim to repay the loan faster by shortening the repayment period.
  • By reducing the tenure, you will have to pay higher EMIs because the principal amount is spread over a shorter duration.
  • While the EMI amount increases, you will be able to repay the loan in a shorter time, saving on overall interest payments.
  • Reducing the tenure is beneficial for borrowers who have a stable income and want to become debt-free quickly.

Regarding reducing the tenure, consider the example of a 25,00,000 loan at an 8.5% interest rate for 20 years. If we make half-yearly repayments of 50,000 until the end of the loan while continuing to pay the regular EMI, we will be able to complete the loan in just 11 years. This approach will result in total loan savings of 13,16,258.

Reduce EMI:

  • Reducing the EMI involves lowering the monthly installment amount that you need to pay towards loan repayment.
  • By reducing the EMI, you extend the loan tenure because the principal amount is spread over a longer duration.
  • While the EMI amount decreases, keep in mind that you will end up paying more interest over the extended tenure.
  • Reducing the EMI can provide short-term relief to borrowers who may have limited cash flow or want to allocate funds to other financial obligations.

Considering the reduce EMI option in the same example of a 25,00,000 loan at an 8.5% interest rate for 20 years, where we make half-yearly repayments of 50,000 until the end of the loan, instead of maintaining the same EMI, we reduce the EMI after each repayment. The EMI gradually decreases from 21,696 to 280 in the final year, and as a result, the loan is completed in 17 years. However, compared to the reduce tenure option, with the reduce EMI option, we end up paying an additional 4,06,062 and extend the loan duration by 6 years.

Choosing between reducing tenure and reducing EMI depends on your financial goals and circumstances. Here are some factors to consider:

  • Financial Stability: If you have a stable income and can afford higher EMIs, reducing the tenure can help you save on interest payments and become debt-free sooner.
  • Cash Flow: If your cash flow is tight or you anticipate future financial commitments, reducing the EMI can provide flexibility and ease your monthly financial burden.
  • Total Interest Paid: If minimizing the total interest paid over the loan’s lifetime is a priority, reducing the tenure is the better option.
  • Loan Type: Different types of loans may have specific terms and conditions regarding tenure reduction or EMI modification. It’s important to check with your lender for the available options.

Ultimately, it’s advisable to consider your financial goals, affordability, and consult with a financial advisor or lender to determine the most suitable approach for your specific situation.