When applying for a home loan, it’s important to know that the loan amount will determine your monthly Equated Monthly Instalment (EMI) payments. The amount of the loan you choose can have a significant impact on the way you pay back your loan. If you know the impact of the loan amount, you might be able to make wise choices for selecting the loan scheme that aligns with your budget, objectives and future planning. An affordable home loan tends to allow people to achieve their dreams of home ownership without much financial burden. However, understanding how the loan amount relates to EMIs may allow you to plan your future with confidence. This article is intended to help you learn how the loan amount affects your monthly EMI payments.
How Does the Loan Principal Determine Your Monthly Obligation?
The loan principal is the amount you borrow from the lender. This is one component that is used in the assessment of your expected EMIs and determines how much you might have to pay back every month. When you make a housing loan choice that offers affordable terms, your EMI increases proportionally.
If you choose to borrow ₹30 lakhs instead of ₹20 lakhs with the same interest rates and timeframe, your payment (loan EMIs) may likely increase. Financial experts often recommend using a home loan calculator to help you assess how the change in loan amount might impact your loan payment before you agree to the loan amount.
Five Ways Loan Amount Impacts Your Monthly EMI Payments
The following is a breakdown of some of the ways that address how the loan amount impacts your monthly EMI payments.
1. Direct Proportional Relationship
One of the fundamental impacts of the loan amount on EMIs is their direct proportional relationship. As your loan amount increases, your EMI increases proportionally when all other factors remain constant.
For example, if a ₹20 lakh affordable housing loan at 8% interest for 20 years results in an EMI of approximately ₹16,700. In contrast, taking a loan of ₹30 lakh with identical terms may result in the EMI of about ₹25,050. This linear relationship can make it essential to use a home loan EMI calculator before finalising your loan amount to ensure the resulting monthly payment aligns with your budget.
2. Interest Accumulation Over Loan Tenure
Larger loan amounts may lead to greater interest accumulation over time. When you borrow more through an affordable housing loan, you not only repay the principal but also pay interest on that larger amount throughout the tenure.
For instance, on a ₹40 lakh loan at 8.5% interest for 20 years, you would pay approximately ₹41 lakh in interest alone. Reducing the loan amount to ₹30 lakhs with the same terms often lowers your interest payment to around ₹31 lakhs.
3. Loan Tenure Requirements
Larger loan amounts often necessitate longer repayment periods to keep EMIs manageable. When opting for a substantial housing loan, you might need to extend the tenure to ensure the resulting monthly payments remain within your budget.
For example, a ₹50 lakh loan at 8% interest would require an EMI of approximately ₹41,800 for a 15-year tenure. The same loan extended to 25 years would reduce the EMI to around ₹38,600. While the monthly difference seems modest, it may be significant for many households. You can use a home loan EMI calculator that may help you visualise clearly how different tenure options affect your monthly obligations for various loan amounts.
4. Down Payment and Its Impact on EMIs
Making a substantial down payment reduces your required loan amount, directly lowering your monthly EMI payments. Many lenders often require borrowers to pay 10-20% of the property value upfront when applying for an affordable housing loan.
By increasing your down payment beyond the minimum requirement, you may significantly reduce the loan amount needed. For example, paying 30% instead of 20% on a ₹50 lakh property can reduce your housing loan requirement by ₹5 lakhs, resulting in lower EMIs throughout the loan tenure.
Financial advisors often recommend using a home loan EMI calculator to compare different down payment scenarios. This may help visualise how varying contributions affect your monthly financial commitments over time.
Practical Approaches to Loan Amount Selection
When determining an appropriate affordable housing loan amount, consider your current income and also your realistic future earnings potential. Remember, career growth may enable comfortable management of potentially higher EMIs over time. Many borrowers choose a loan amount that results in EMIs representing 30-35% of their current income, leaving room for other financial goals and unforeseen expenses.
Conclusion
The loan amount you choose forms the foundation of your EMI calculation and significantly influences your financial journey for years to come. Using a home loan EMI calculator provides valuable insights into how different loan amounts translate to varying monthly commitments. By understanding the relationship between loan amounts and EMIs, making informed decisions about down payments, and selecting appropriate tenures, you may optimise your housing finance strategy. Remember that the ideal loan structure aligns with both your current financial situation and future goals, ensuring that your home purchase brings joy rather than financial strain.