Loans & EMI

The only three numbers that matter on any loan

Lenders advertise the EMI because it is the smallest, friendliest number. The three figures that actually determine whether a loan is a good idea are:

1. The total interest paid over the full tenure. A ₹50 lakh home loan at 8.5% over 20 years costs about ₹54 lakh in interest, more than the loan itself.
2. The effective annual rate including fees. Processing fees, documentation charges, insurance bundled into the loan and prepayment penalties all raise the true cost above the headline rate.
3. Your EMI-to-income ratio. Lenders will approve up to 50-60% of net income going to EMIs. Living comfortably usually requires staying below 40%.

Run any offer through the EMI calculator before you sign. Seeing the total interest figure next to the EMI changes most borrowing decisions.

Loan types in India, compared

The spread from top to bottom of that table is enormous. The same ₹5 lakh borrowed costs about ₹1.1 lakh in interest as a home loan top-up over five years, and about ₹3.5 lakh as a revolving credit card balance. Matching the right product to the need is worth more than negotiating a quarter-percent off any single rate.

How lenders decide: eligibility in practice

Four things drive approval and pricing.

Credit score. In India, CIBIL, Experian, Equifax and CRIF High Mark all issue scores, and lenders usually pull at least one. Above 750 you get the advertised rate. Between 700 and 750 you are approved but priced higher. Below 650 most mainstream lenders decline unsecured lending entirely. The credit score hub covers how to move that number.

FOIR (Fixed Obligation to Income Ratio). This is all your existing EMIs plus the proposed one, divided by net monthly income. Most lenders cap it at 50-55%, and some allow 60% for high earners. If your salary is ₹1,00,000 net and you already pay ₹15,000 in EMIs, a lender working to a 50% FOIR will approve a new EMI of roughly ₹35,000.

Income stability. Salaried applicants with two or more years at recognised employers get the best terms. Self-employed applicants typically need three years of ITRs and audited financials, and are priced 0.25-1% higher.

LTV (Loan to Value) on secured loans. Home loans go up to 75-90% of property value depending on ticket size; the rest is your down payment, plus stamp duty and registration which are never funded. Check what you qualify for with the home loan eligibility calculator.

Fixed vs floating rates

Almost all Indian home loans are floating and linked externally to the RBI repo rate, so your rate resets as the repo rate moves, usually every three months. Lenders typically adjust your tenure rather than your EMI when rates rise, which hides the cost: your EMI looks unchanged while your loan quietly stretches by years.

Ask your lender to increase the EMI instead of the tenure when rates rise. It costs a little more each month and saves a great deal in total interest.

Fixed-rate home loans exist but are priced 1-2% above floating and often convert to floating after a few years, which usually makes them poor value. For short-tenure loans (car and personal) rates are effectively fixed anyway, so the question does not arise.

Prepayment: the highest-return decision most borrowers can make

Prepaying a loan gives you a guaranteed, tax-free return equal to the loan's interest rate. On a personal loan at 14%, that is a risk-free 14%, better than any investment with comparable certainty.

How the maths works. In an amortising loan, the early EMIs are mostly interest. On a 20-year home loan, roughly 60% of what you pay in the first five years is interest. That is exactly why early prepayment is so powerful and late prepayment is nearly pointless.

A concrete example on a ₹50 lakh loan at 8.5% for 20 years, where the EMI is about ₹43,400:

• Paying one extra EMI per year cuts the tenure by roughly 4 years and saves around ₹12-13 lakh in interest.
• Increasing the EMI by 5% every year clears the loan in about 12 years instead of 20.
• A ₹5 lakh lump-sum prepayment in year 3 saves roughly ₹15 lakh over the remaining term.

Rules to know: floating-rate home loans taken by individuals cannot carry prepayment or foreclosure charges under RBI rules. Fixed-rate loans and loans to non-individuals may. Personal and car loans often carry 2-5% foreclosure charges and sometimes a lock-in of 6-12 months, so check before you plan around prepayment.

When not to prepay: if you have no emergency fund, if you are carrying higher-rate debt elsewhere, or if the loan is a home loan at 8.5% and you are in the old tax regime claiming the full Section 24(b) interest deduction. The effective post-tax cost may drop to around 6%, which is close enough to debt-fund returns that the decision becomes a preference rather than a clear win.

Which loan to attack first

If you carry several loans, two approaches work:

• Avalanche (mathematically optimal): pay minimums on everything and throw all surplus at the highest interest rate first. Always the cheapest path.
• Snowball (psychologically easier): clear the smallest balance first for the motivation, then roll that payment into the next.

For most Indians the answer is unambiguous: clear revolving credit card balances first, at 36-46% annualised, before anything else. Then personal loans, then car loans, then education and home loans last.

How loans affect your credit score

• Payment history is roughly a third of your score. One EMI bounce can cost 50-80 points and stays on your report for years.
• Applying to several lenders in a month generates multiple hard enquiries and lowers your score. Use aggregator soft-check tools for comparison instead.
• A well-managed loan actively helps. A mix of secured and unsecured credit, paid on time, builds a stronger profile than having no loans at all.
• Closing a loan is good; settling one is not. A settlement is recorded as "settled" rather than "closed", and that flag can block borrowing for years.
• Get the NOC and check your report after closure. Lenders sometimes fail to update bureaus, leaving a closed loan showing as active and eating your eligibility.

Common borrowing mistakes

• Choosing the longest tenure for the lowest EMI. A ₹10 lakh personal loan at 14% costs about ₹3.9 lakh in interest over 5 years and ₹1.5 lakh over 2 years.
• Accepting bundled insurance financed into the loan. You then pay interest on the premium for the entire tenure.
• Ignoring processing fees and stamp duty. These can add 1-2% to the effective cost.
• Taking a personal loan to invest. The rate gap makes this a reliable way to lose money.
• Using a car loan for a depreciating asset over 7 years. The car is often worth less than the outstanding balance for much of the term.
• Not comparing the rent alternative before a home loan. The rent vs buy calculator frames this honestly.

Before any borrowing decision, model it: EMI for the payment, home loan eligibility for the ceiling, and the personal loan, car loan and education loan calculators for specific products. And make sure the EMI fits a real budget. The budgeting hub covers how to build one.