What does an EMI consist of?

An Equated Monthly Instalment consists of the principal amount and interest payable that needs to be paid until the tenure of the loan ends.

How does the debt-to-income ratio affect my chances of availing of a loan?

The debt-to-income ratio, also referred to as the DTI ratio, is a crucial factor that lenders keep in consideration while evaluating the borrower’s eligibility for loan purposes. It is calculated by dividing the borrower’s total monthly debt payments by the gross monthly income. A lower DTI ratio indicates that the borrower has sufficient income to cover his existing debts along with new loan payments. Hence, it is generally favourable because it ensures a lower risk of default. On the contrary, a higher DTI ratio indicates that a significant portion of your current monthly income is already committed to previous debt obligations, potentially limiting your capacity to take on more debt. Hence, this might lead to difficulty in borrowing new loans or the interest rates offered might be higher than usual.

What happens if I fail to pay my EMIs?

In the case a borrower misses an EMI payment, the bank might charge a heavy penalty fee. This extra fee may cause your overall debt obligation to increase, thus raising the cost of repayment of the loan. Moreover, delayed payments of the installment are reflected in the borrower’s credit report, thus having a negative impact on the credit score because your credit score is directly impacted by the payment history. Poor credit scores can result in difficulties in taking out a loan in the future. If you consistently fail to pay your EMI obligations, the lenders have the right to file a lawsuit to recover the amount.

Is it good to pre-close a loan before the end of its tenure?

Pre-closing a loan obligation prior to the end of its tenure can be subjective. While it is beneficial for most borrowers as it saves interest payments, thus providing financial freedom from debt and maintaining a higher credit score; borrowers must evaluate the overall financial impact by considering the opportunity cost and the prepayment charges imposed.

Is it good to pay EMI on time?

It is important to pay EMI on time to ensure a positive credit history and a satisfactory credit score. This is because a higher credit score significantly contributes to your eligibility and lower interest rates for future loan requirements. Higher credit scores also reflect the financial discipline and reliability of the borrower, thus fostering a positive relationship with the lender. Additionally, timely EMI payments prevent legal actions against the borrower as well as any kind of penalties or late fees.