Choosing Between EMI Reduction and Loan Tenure: What's the Better Option?

When faced with the decision of whether to opt for EMI reduction or tenure reduction during loan prepayment, it becomes crucial to evaluate the long-term financial implications. Prepayment is advantageous in expediting the loan repayment process. However, the choice between reducing the Equated Monthly Installment (EMI) or the loan tenure requires careful consideration.

Choosing to reduce the EMI provides a temporary relief, freeing up additional funds for managing other financial obligations. Yet, this approach comes at a cost. By opting for lower EMIs, the borrower ends up elongating the loan tenure, resulting in a higher overall interest burden. While it may seem financially liberating in the short term, the borrower ultimately pays a substantial amount in interest over the extended period.

On the other hand, opting for tenure reduction allows borrowers to pay off the loan sooner than the initially agreed-upon period. This choice proves more financially prudent in the long run, as it significantly reduces the overall interest paid. The prepayment amount used for tenure reduction proves to be more profitable in terms of both time and interest saved.

Considering the psychological impact of EMIs being akin to a set expense on auto-mode, choosing tenure reduction can provide a sense of financial freedom. Using the example of Mr. A with a 30,00,000 loan at 8% interest for 20 years, a prepayment of 5,00,000 at the end of the 5th year demonstrates the stark contrast in outcomes. Opting for EMI reduction yields minimal time savings, while choosing tenure reduction results in substantial interest savings and an accelerated loan payoff.

View this post on Instagram

A post shared by Ujjawal Pahwa | Finance (@cs.ujjawalpahwa)

In conclusion, the decision between EMI reduction and tenure reduction during loan prepayment should hinge on the desire to save on interest costs in the long term. Prioritizing time reduction over temporary financial ease is a strategic move for borrowers seeking to achieve financial freedom sooner.

Also Read: RBI Boosts UPI Limits: Insights from Ujjawal Pahwa