Today it is very common to shop on EMI (Equated Monthly Instalment). An EMI is a monthly payment that includes interest and charges. But today, as it was very easy to get loans, people take multiple loans and then face difficulties during EMI repayment. So, let's take a look at some of the common mistakes that you need to avoid while planning EMI to ensure that it doesn't affect your financial health.

8 EMI Mistakes You Should Avoid

1. Late payments

Late payment of 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. Increased loan tenure

Choosing a longer loan term may reduce your monthly payments. However, in the long run, you have to pay more interest. While it is 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 of money on interest payments, and with long-term savings, you can quickly get out of debt.

3. Borrowing more

Borrowing more money than you can comfortably repay can lead to financial stress and meeting your EMI obligations. Before taking out a loan, carefully evaluate your income, expenses, and existing financial obligations. It's important to make sure your EMIs fit into your budget and make room for other essential expenses and savings.

4. Pre-payment options are ignored

Pre-paying your loan will help you save money on interest. By making additional payments in advance, you can reduce the total amount of interest you pay on the loan. However, you should also be aware that some loans may have prepayment penalties or restrictions, so you should be very careful before making any additional payments. Taking advantage of prepayment options whenever possible will definitely speed up your journey to financial freedom.

5. Loan terms not reviewed

Do you review the terms of your loan before signing the dotted line? If not, that's wrong. Not reviewing the terms of your loan agreement can lead to unexpected costs and misunderstandings. You should pay attention to details such as interest rates, processing fees, and any other charges stated in the contract.

6. Emergency fund ignored

An emergency fund is needed 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, it becomes challenging for you to meet your EMI obligations, which may lead to default or additional debt. An emergency fund can be helpful in such cases. Therefore, always be careful to build an emergency fund that is equal to at least three to six months of living expenses.

7. Avoiding insurance

Never ignore insurance coverage for your loan because it can protect you and your family from financial hardship in the event of unforeseen events, such as illness, disability, or death. Loan insurance policies provide coverage that can help you repay the amount of your outstanding personal or car loan and free your loved ones from debt.

8. 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 a large portion of your income is spent on paying off debt and only a small amount is left over for other essential expenses. So, make sure you maintain a healthy financial profile and try to keep your debt-to-income ratio below 40%.