Shopping on EMI (Equated Monthly Installment) is very common these days. EMI is an amount that includes principal and interest payable monthly. But today, as getting loans has become so easy, people take multiple loans and then face difficulties during EMI repayment. So, let's take a look at some of the common mistakes you should avoid while planning EMI to ensure that it doesn't affect your financial health.
8 EMI Mistakes You Should Avoid
- Late Payments
Late payment of your EMIs can lead to penalties in the form of late payment fees and damage your credit score. These fees may seem small at first, but they add up over time. Also, a low credit score can make it difficult to get personal loans or credit cards in the future. So, set reminders or use automatic payments so that you can avoid this mistake, you always pay your EMIs on time and maintain a good credit history.
- 2. Taking maximum loan tenure
Choosing a longer loan term may lower your monthly payments. However, more interest has to be paid in the long run. While it may be tempting to have smaller EMIs, it is important to consider the total cost of the loan. By choosing a shorter term, you can save a significant amount on interest payments, and you can get out of debt faster with long-term savings.
- Excessive borrowing
Borrowing more money than you can comfortably repay can lead to financial stress and meeting your EMI obligations. Before taking a loan, carefully assess your income, expenses and existing financial obligations. It is important to ensure that your EMIs stay within your budget and leave room for other essential expenses and savings.
- 4. Ignoring prepayment options
Prepaying your loan can help you save money on interest. By making extra payments upfront, you can lower the total interest you pay on the loan. However, you should also note that some loans may have prepayment penalties or restrictions, so be careful before making additional payments. Taking advantage of prepayment options whenever possible will definitely speed up your journey to financial freedom.
- Not reviewing loan terms
Do you review your loan terms before signing the dot line? If not, it's wrong. Failure to review the terms of your loan agreement can lead to unexpected costs and misunderstandings. You should pay attention to the details like interest rates, processing fees and any other charges mentioned in the contract.
- Ignoring the emergency fund
An emergency fund is essential to save you in unexpected situations. Having an emergency fund is also important for financial stability. When you have unexpected expenses or loss of income, meeting your EMI obligations will surely become challenging for you and may lead to default or additional loan. An emergency fund can be helpful in such cases. So, always make sure to build an emergency fund equal to at least three to six months of living expenses.
- Waiver of Insurance Coverage
Never neglect insurance coverage for your loan as it can protect you and your family from financial hardship in the event of unexpected events like illness, disability or death. Loan insurance policies provide coverage to help you repay your outstanding personal or car loan amount and free your loved ones from debt.
- Ignoring the debt-to-income ratio
Your debt-to-income ratio is an important factor in determining your financial health. A high ratio indicates that you are spending a large portion of your income on paying off debt and leaving little to spare for other essential expenses. So, make sure you maintain a healthy financial profile and try to keep your debt-to-income ratio below 40%.
