How Interest Rates Impact Your Loan Tenure and EMI Payments

Interest rates play a crucial role when getting a loan, as they directly influence your EMI (Equated Monthly Installment) payments and loan tenure. Whether you're considering a Personal Loan, Pre-owned Car Loan or a Business Loan, interest rates play an essential role in determining how much you'll pay overtime. In this blog, we’ll explore the impact of interest rates on loan tenure and EMI payments, and how you can make informed financial decisions. Let’s get started!

Types of Interest Rates

Interest rates represent the cost of borrowing money from a lender and can be categorised as:
•    Fixed Interest Rates: These interest rates remain constant throughout the loan tenure, by providing stability in EMI payments.
•    Floating Interest Rates: These fluctuate based on market conditions, leading to potential variations in EMI amounts.
The type of interest rate chosen affects your overall repayment strategy, making it essential to understand its impact before selecting a loan.

How Interest Rates Affect EMI Payments

Your EMI comprises two components:
1.    Principal Repayment: This is the portion of EMI that reduces your loan amount.
2.    Interest Payment: It is the cost of borrowing that the lender charges.
The formula for calculating EMI is:
[Interest = Principal x Rate x Time] Where:
•    P = Principal Loan Amount
•    r = Monthly Interest Rate
•    n = Loan Tenure (in months)
If you opt for a floating interest rate, as the interest rates increase, and the EMI payment rises because the interest component becomes higher. Similarly, when interest rates decrease, EMI payments reduce, making loans more affordable.

Example of EMI Impact Due to Interest Rates

Let’s consider if you take a Personal Loan of ₹10,00,000 with a tenure of 10 years:
•    At 8% interest rate: The EMI will be ₹12,133
•    At 10% interest rate: The EMI will be ₹13,215
•    At 12% interest rate: The EMI will be ₹14,345
This example shows how even a small increase in the interest rate can significantly impact your monthly payments.

How Interest Rates Influence Loan Tenure

The two types of interest rates, fixed and floating impact loan tenure in differently:

Fixed Interest Rate

• The interest rate remains constant throughout the loan tenure.
• Your monthly EMIs (Equated Monthly Installments) are consistent.
• Loan tenure is predetermined and does not change, as the interest rate is fixed.

Floating Interest Rate

The interest rate fluctuates based on market conditions or benchmark rates. Your monthly EMIs or loan tenure can change over time:

• If interest rates increase, EMIs may increase, or the tenure may be extended.
• If interest rates decrease, EMIs may decrease, or the tenure may be shortened.
• Lenders may offer options to either adjust EMIs or change tenure based on rate changes.

Impact on Loan Tenure

In fixed-rate loans, the tenure is predictable and does not change. Whereas in the floating rate loans, the tenure may vary based on rate fluctuations unless you opt for changing the EMIs instead of tenure. 

Strategies to Manage Loan Tenure and EMI Payments

Here are 4 strategies you must follow to manage your loan tenure and EMI payments:

1.    Compare Interest Rates: Before availing of a loan, research different lenders to find the most competitive rates.
2.    Opt for Pre-payments: Making occasional lump-sum payments can reduce your principal, and it can decrease future interest payments.
3.    Consider Refinancing: In floating interest rate, if interest rates increase, refinancing your loan can help secure lower EMIs or shorter tenure.
4.    Choose the Right Loan Tenure: Find a balance between manageable EMI payments and minimising long-term interest costs.

To Conclude

Interest rates are a crucial factor in determining your EMI payments and loan tenure. A small difference in interest rates can have a huge impact on your overall loan cost. By understanding how interest rates work and making informed choices, you can optimise your loan and save a considerable amount of money. Always use an EMI calculator, so that you have a better understanding of your loan EMIs which can help you plan your repayment efficiently. 
Empower your dreams with Poonawalla Fincorp’s loans and be aware of your loan EMIs with our simple and instant EMI calculator. 

Frequently Asked Questions

1.    Can I negotiate the interest rate with the lender?

Yes, you can negotiate the loan interest rate with the lender if you have a good credit score and repayment history. 

2.    Can I reduce my loan tenure by increasing my EMI?

Yes! By opting to pay a higher EMI, you can reduce the overall tenure of your loan. This helps in minimising the interest payments over time, which saves you money in the long run.

3.    How often do floating interest rates change?

The floating interest rate can change frequently, depending on various factors such as inflation, economic conditions and the RBI.