When considering a home loan or personal loan, it is essential to understand the financial implications of your borrowing. This means estimating your monthly payment obligations and planning ahead. While calculating EMIs is easy, you must avoid some common mistake that can derail calculations and result in inaccurate estimates. This article offers insights on 10 such mistakes you should avoid at all costs.
Ten common mistakes to avoid when calculating EMIs
Make sure to avoid these common pitfalls when calculating loan EMIs to ensure accurate results:
- Calculating EMIs manually
Attempting to calculate EMIs manually can be both time-consuming and tedious. It can also result in inaccurate outputs given the potential for human error. Instead, you can simply use an online EMI calculator tool to simplify these complex calculations, ensuring swift and accurate results.
- Entering the wrong loan amount
Another common mistake is entering the wrong principal amount figure into the EMI calculator. Let’s say, you enter a lower loan amount figure into the EMI calculator than what you actually intend to borrow. Since the principal is low, your EMIs will be low. This will mistakenly lead you to believe that you can easily manage the repayment, when, in fact, you may not be able to do so.
- Overlooking loan duration
Inaccurately choosing a loan duration can be a grave mistake in EMI calculations. Blindly opting for a longer tenure to ensure manageable EMIs can cost you in interest expenses over time. Similarly, choosing a shorter tenure to become debt-free faster can put undue pressure on your finances. Make sure you consider your budget and needs before choosing a tenure.
- Neglecting the interest rate
Interest rate is an important component of EMI calculations. Inputting the wrong interest rate can result in incorrect EMI estimates. Since interest rates on loans are revised frequently, you should check the most current rates applicable to accurately compute EMIs payable.
- Forgetting about additional charges
Many borrowers forget to factor in the various ancillary costs like processing fees and late payment fees associated with a loan. Neglecting these charges will result in an estimate that does not accurately represent the total amount you must ultimately pay. Remember to research about such ancillary costs beforehand to determine your total loan cost effectively.
- Not considering prepayment options
If you plan to channelise annual bonuses and tax refunds to make prepayments for the loan, remember to factor that in. Making prepayments on a loan reduces the principal due, which in turn lowers the overall interest payable. This results in lower EMIs and shortens your loan tenure.
- Failing to compare other offers
Many borrowers tend to stick with a tried and tested lender and avoid shopping for loan offers. However, running numbers from just one lender can come in the way of securing the loan at a lower cost since interest rates vary among lenders. Failing to use the EMI calculator tool to compare loan offers from different NBFCs and banks can prevent you from enjoying a lucrative loan offer.
- Not factoring in the type of interest rate offered
Borrowers often forget that EMI estimates depend on the type of interest rate offered on the loan. If the loan is sanctioned against a floating rate of interest, then you should remember to factor in the potential for rate fluctuations while computing EMIs. Failing to do so will result in incorrect estimates.
- Using the wrong EMI calculator
There are various types of EMI calculators available on online marketplaces, each tailored to a specific loan type. If you choose the wrong type of EMI calculator, EMI estimates can be erroneous. For instance, if you are applying for a home loan, make sure you use a home loan calculator and not a personal loan EMI calculator for 100% accurate results.
- Ignoring the impact of loan insurance
Loan insurance is often mandatory for certain types of secured loans like home and car loans. However, obtaining insurance is an additional cost. Some policies add the extra premium expenses to your monthly EMIs, thereby increasing the magnitude of your monthly payment obligations. If your loan requires insurance, make sure to factor that in while computing EMIs.
Conclusion
Every borrower must calculate the EMIs due for loans to effectively plan repayment. However, when estimating EMIs, it’s important to avoid the common mistakes listed above. Mistakes like incorrect loan amounts, wrong tenures, and neglecting additional costs can impact the accuracy of your EMI estimates.
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