Personal loan: How does the EMI calculator help to avoid loan overleveraging? | Mint

A personal loan is a convenient and quicker way to fund diverse financial requirements. Borrowers who require urgent funds without collateral often opt for a personal loan. However, some may borrow more than they can repay in the future, leading to a debt cycle or loan leveraging.

What is loan overleveraging?

Loan overleveraging occurs when a borrower borrows too much money and is unable to pay interest, principal, or other related costs due to the debt burden.

Borrowers often end up in a loan overleveraging situation when they do not estimate the total cost of the loan correctly. In order to calculate the actual cost of a loan an EMI calculator is necessary.

What is an EMI calculator?

An EMI calculator is a financial tool for calculating the monthly payments, or Equated Monthly Instalments (EMIs), of a loan that includes interest and principal repayment amounts.

Uses of EMI calculator to avoid loan overleveraging

Total costs

Calculating the total costs included in a personal loan is challenging without an EMI calculator. Borrowers mostly consider only interest payments and miss out on other charges such as GST, prepayment penalty and processing fees included in the loan. 

An EMI calculator gives an estimate of the total cost of a loan, including such charges. Calculating charges apart from interest payments becomes more important in low-interest loans, where other fees may be higher, raising the cost of the loan.

Loan amount

Before choosing a personal loan, estimate the loan amount that suits your financial situation so that you can repay comfortably in the future. Through EMI calculators, you can calculate the loan amount on the basis of interest rate, tenure and suitable monthly repayment amount.

Solely relying on eligibility criteria

Lenders often try to attract borrowers with several loan options, offering them funds at a lower interest rate or better terms. Borrowers may be influenced by such offers and opt for such loans if they meet the eligibility criteria without estimating the total cost, leading to a loan overleveraging situation. However, the eligibility criteria do not show the impact of loans on your finances. An EMI calculator will help you understand the impact of such loans on your finances.

Several options

With the financial landscape constantly evolving, the options available in the personal loan space are expanding, too. It is essential to research every option before deciding on a loan to make a smarter financial decision. Failing to do so may result in choosing a loan with unfavourable terms that may impact your finances. EMI calculators will help to explore multiple loan options with different tenures and interest rates.

Changes in interest rates

EMIs on a personal loan with floating interest rates will change from time to time. Several EMI calculators have the feature of calculating monthly instalments according to changing rates, giving you an estimation of the total cost of the loan. You can this feature and plan your future expenses accordingly without straining your finances.

Prepayment of loan

Borrowers prefer the prepayment of loans to save on interest costs. However, several lenders charge a prepayment penalty, which is a cost on your loan. EMI calculators give an estimate on how prepayment of a loan can influence your finances.

In conclusion, as a smart borrower, it is important to avoid loan overleveraging as it might strain your finances heavily. Therefore, to make a smart financial decision, use an EMI calculator to estimate the various costs and choose a loan that suits your financial situation.

(Note: Raising a loan comes with its own risks. So, due caution is advised)