The EMI, or the equated monthly instalments, have put a lot of things within our reach. Everything from a car to a house to a laptop or even a mobile phone can be purchased with EMIs. But with all this purchasing power comes the possibility of getting burdened with debt. So, while EMIs are reasonable, they can also land you in trouble. The question now is, how can an EMI help you live a better life?
How Do EMIs Work?
When you want to purchase something that costs more than what you want to pay in one go, you can pay for it in instalments. This is where the monthly instalments come in. You simply take the purchase price, add interest to it, divide it by the number of months, and that’s your monthly payment.
You can go home with what you bought and keep paying for it in small bits over the next few months.
How to Ensure EMIs Don’t Become Crushing Debt?
Since EMIs are so common nowadays, you need to be extra careful in using them. Here are some ways of using EMI in a way that gets you what you want without acquiring crushing debt.
- Use EMIs only for big purchases
Reserving the use of EMIs for big things like car loans and home loans is the way to go. If you are buying small things like household items, it’s better to pay for them in full.
- Use an EMI calculator before buying anything
EMI calculators allow you to assess the loan EMIs. Let’s say you want to buy a car. In this case, using a car loan calculator will let you know exactly how much you can borrow. It will show you what amount you are eligible for and what the monthly payments will be like.
If you already have one EMI to pay back, don’t take on a second. If there are too many instalments to pay, you’ll soon end up giving away most of your monthly income in monthly payments. This means you’ll have little to nothing left to run your house with.
- Use EMI calculators to compare interest rates
Suppose you want to buy a house; using a home loan calculator, you can get a better picture of the exact EMI compared to your interest rates being offered. This is a crucial step because putting in combinations of the amount to be borrowed, interest rates and processing fees can help you find the cheapest loan with the best EMI rate.
- Keep the debt-income ratio low
EMIs are debt, and debt needs to be paid back with income. So, if you want to look for a magic number where income and debt are in balance, it’s 30% or less. This means that no more than 30% of your monthly income should go towards clearing debt. Therefore, your EMIs, all of them put together, can’t exceed 30% of your monthly income.
Some will tell you that EMIs are terrible and that if you can’t pay for something upfront, you shouldn’t buy it. But the fact of the matter is that EMIs can enable you to live the life you want and pay for it in a pocket-friendly way. The only thing you need to do is to make sure that you don’t buy too many things on EMI at once.