New Delhi: When someone suddenly needs money, their first thought often turns to a loan. You need not worry if you require funds during an emergency; a personal loan can be an excellent option that requires no hassle. Whether it is for wedding expenses, a medical emergency, or essential home repairs, a personal loan allows you to address the situation effectively.
You can secure a personal loan from a bank in a very short time. The best part is that no collateral or security is required to obtain it, which is why many people prefer this option.
It is easy to understand how much you would need to repay if you take out a loan of ₹5 lakh. The answer depends on the interest rate and the loan tenure. As the interest rate rises, the EMI increases accordingly, leading to a higher total repayment amount to the bank.
Interest payable on a ₹5 lakh loan
Suppose you take a personal loan of ₹5 lakh for a tenure of 5 years (60 months). Interest rates typically range from 10% to 25%, depending on factors such as your credit score and income. Here is how the EMI and total interest would look based on the interest rate:
₹5 lakh loan at 10% interest
If the interest rate on the personal loan is 10%, the monthly EMI for a ₹5 lakh loan would be approximately ₹10,624. Over the 60-month tenure, the total amount paid to the bank would be around ₹6.37 lakh, with the interest component amounting to approximately ₹1.37 lakh.
Payment required at 12% interest
If the interest rate is 12%, the EMI will increase to approximately ₹11,122. The total repayment over five years would be around ₹6.67 lakh, with the interest component amounting to approximately ₹1.67 lakh. Even a 2% difference in the interest rate significantly impacts the total interest payable. Therefore, one should not overlook the interest rate offered when taking out a loan.
What will the EMI be at 15% interest?
If you take a personal loan of ₹5 lakh from a bank at an interest rate of 15%, the monthly EMI will be approximately ₹11,895. Over five years, the total repayment will amount to around ₹7.14 lakh, which includes approximately ₹2.14 lakh in interest. It is worth noting here that while the principal loan amount remains ₹5 lakh, the total amount to be repaid to the bank increases substantially due to the higher interest rate.
A loan at 20% interest is the most expensive.
If the personal loan interest rate is 20%, the EMI will be around ₹13,247. Over five years, the total repayment will reach approximately ₹7.95 lakh; this means you would pay about ₹2.95 lakh in interest to borrow ₹5 lakh.
The difference between a 10% and a 20% interest rate is just 10 percentage points, yet the difference in total interest paid over five years amounts to approximately ₹1.58 lakh. Therefore, negotiating the interest rate effectively when taking a personal loan can be beneficial.
Don’t decide based solely on the EM.I
People often focus only on the EMI when taking a personal loan, but this is not the right approach. A lower EMI does not always mean a cheaper loan. If the loan tenure is long, the total interest paid can be higher, even though the monthly outflow is lower.
Therefore, before taking a loan, one should consider all three factors: the interest rate, the loan tenure, and the total repayment amount. The maximum loan amount a bank is willing to offer should not be the sole deciding factor; what matters more is determining an EMI amount that you can comfortably repay based on your income.
