Reducing Home Loan EMI or Loan Tenure: Which is Better?

Buying a house is a significant event for most Indians, often requiring a home loan. Although home loans are an easy way to own a home, you may find it hard to manage Equated Monthly Installment (EMI) each month. This begs the need for a discussion on whether it is better to reduce EMI or reduce loan tenure.

In this article, we will discuss these two options, demonstrating how to use an EMI tenure reduction calculator, and talk about some tips for making the right decision.

Understanding the Basics of EMI and Tenure

Before getting into the details, here are some key terminologies:

• EMI: Your fixed monthly payment to the lender which consists of both – the principal amount borrowed plus interest charged at that time.
• Tenure: The total repayment period for your loan is typically measured in years.

These two characteristics play a significant role in determining your overall repayment. While lower EMIs enable you to pay each month conveniently, they also elongate the duration period of the loan.

Therefore, while the first case allows you to pay less every monthly cycle, a shorter loan tenure saves more on total interest paid – but this may raise your monthly EMIs.

Also Read: How to Choose the Right Home Loan Tenure?

What Happens After Making a Home Loan Part-Payment?

When you make a part-payment towards your home loan, the extra amount directly reduces the outstanding principal balance. This lowers your overall interest burden and gives you two key options, depending on what your lender allows:

• EMI Reduction – Your monthly EMI amount decreases while the loan tenure remains the same. This option is suitable if you want to reduce your financial burden and improve monthly cash flow.
• Tenure Reduction – Your loan tenure shortens, while the EMI remains the same. This helps you save more on total interest outgo over the loan’s lifetime.

Lenders in India may also have conditions like a minimum prepayment amount (e.g., at least one EMI) and could levy prepayment charges, especially for fixed-rate loans. Floating-rate home loans usually come with zero prepayment penalty as per RBI guidelines.

You can use tools like an EMI Calculator for LAP (Loan Against Property) or a Home Loan EMI Calculator to compare how part-payments affect your EMI and overall repayment schedule. Many banks and financial institutions in India offer these calculators online for quick reference.

Should You Reduce Tenure or EMI?

Choosing between reducing your EMI or loan tenure depends on your financial situation. Let’s look at both scenarios.

Scenario 1 – Reducing EMI

Lowering monthly payments helps alleviate financial hardships during periods of reduced income. This would be the case if:

• There has been a salary cut in your current organization.
• You need funds for other major expenses such as school fees for children or hospital bills.
• This can help increase the amount of money you save every month.

Pros of Reducing EMI:

• Allows for more cash at hand.
• In case of financial difficulties, lower chances one may fail to service the debt.

Cons of Reducing EMI:

• Over the entire loan period, more interest is paid.
• Lengthens the debt repayment point to an extended period.

Scenario 2 – Reducing Loan Tenure

A stable financial situation may warrant a shorter period if the higher EMI can be afforded. The following reasons make sense in this context:

Pros of Reducing Loan Tenure:

• Uses less money on interest over time, saving money instead.
• Clears debt sooner, leading to quick financial liberation and, thus, a good reputation for borrowing in the future.

Cons of Reducing Loan Tenure:

• This option leads to increased monthly repayments that may be unsupportable by some budgetary provisions like salaries and wages, amongst other things.
• Another problem with this one is the lack of immediate access to cash flow, which leaves no space for investment planning or any unforeseen eventualities that might arise.

EMI Vs loan tenure – Which is better for you?

When making a part-payment, you can either reduce your EMI or shorten your loan tenure. Each option has its own benefits depending on your financial goals. The table below compares both approaches:

Also Read: Loan Tenure: All You Need to Know

Using a Calculator for Smart Decisions

To ensure informed choices, utilize resources such as home loan EMI tenure reduction calculators available online. Often, it's referred to by different names, such as a loan repayment calculator or a prepayment calculator.

They allow you to compare scenarios and enable you to see how altering either tenure or EMI will affect your cash flow. These calculators may also provide guidance on:

• EMIs for longer loan tenures
• Interest saved with shorter loan tenures

How to Decide Between EMI Reduction and Tenure Reduction?

When you make a part-payment on your home loan or Loan Against Property (LAP), the lender usually gives you two options—reduce your EMI or shorten your loan tenure. The right choice depends on your financial situation and long-term goals. Below are key factors to help you decide:

• Income Stability – If you have a steady income flow, opting for tenure reduction helps you close the loan faster and save more on interest. For fluctuating or uncertain income, EMI reduction offers better monthly relief.
• Financial Goals – Borrowers aiming to become debt-free sooner or reduce long-term liability should choose tenure reduction. Those prioritizing cash flow for investments, savings, or household expenses may benefit from lower EMIs.
• Upcoming Expenses – If you foresee major expenses such as children’s education, healthcare, or business expansion, reducing your EMI ensures more liquidity for meeting these commitments.
• Risk Tolerance – Conservative borrowers often prefer lower EMIs to avoid financial strain, while those willing to handle higher commitments may opt for tenure reduction to save on interest costs.
• Tax Implications – Home loan borrowers can claim tax deductions on interest paid. A longer tenure with reduced EMI may allow you to enjoy these benefits for more years, whereas tenure reduction shortens the tax benefit period.
• Interest Rate Trends – In a falling rate scenario, reducing EMI might be better as future EMIs could get even lower. In a rising rate cycle, reducing tenure can help minimize interest burden.

Use a Loan Against Property EMI Calculator or LAP EMI Calculator to compare both scenarios. This helps you understand the exact savings and decide which option aligns with your financial strategy.

Common Myths and Misconceptions about EMI and Tenure Reduction

When it comes to part-prepayments on a home loan or Loan Against Property (LAP), borrowers often fall for certain myths. Clearing these misconceptions is essential to make informed financial decisions.

• Myth 1: EMI reduction always saves money
  Many assume that reducing EMI after part-payment is the best choice. While it eases monthly cash flow, it does not always reduce the total interest paid. In fact, tenure reduction typically leads to higher long-term savings by lowering overall interest liability.
• Myth 2: Tenure can be reduced anytime
  Borrowers often think tenure reduction is always available as an option. However, lenders may set conditions, such as minimum outstanding balance or specific prepayment terms, before allowing tenure adjustment. Always check your lender’s policy before planning.
• Myth 3: Both EMI and tenure can be reduced simultaneously
  It’s a common misconception that a single part-payment can lower both EMI and tenure at the same time. In reality, lenders usually allow you to choose only one option - either reducing EMI or reducing tenure. A clear decision based on financial priorities is necessary.

Understanding these myths helps borrowers align their repayment strategy with actual benefits instead of assumptions. Using an LAP EMI Calculator can provide clarity by showing the real impact of each choice.

Tips on How to Make Home Loan Tenures Shorter

If you prefer making your loan tenure shorter, you may want to consider:

• Prepaying: Pay off some portion before the due date with bonuses or windfall. Banks like SBI and HDFC allow such partial prepayments without penalties.
• Opting for Increased EMI Payments: You can do this, especially when your income grows over time until it matches with a higher EMI amount repaid each month, as may be required by some lenders.
• Refinance to Enjoy Better Rates: Use balance transfer options to switch to lower-interest loans.

Does it Make Sense to Reduce the Loan Term?

Hence, it is possible to reduce the term of your home loan. Get advice from your bank and use calculators such as home loan tenure reduction calculators for effective planning. Remember – even small changes can result in huge savings over the long run of the loan duration.

Yes, reducing the loan term can be a smart choice if your goal is to save on total interest outgo. Even though your EMIs may remain the same or increase slightly, the overall interest burden reduces significantly. Get advice from your bank and use tools like a Home Loan Tenure Reduction Calculator to evaluate your savings. Remember – even a small adjustment in tenure can result in huge savings over the long run.

By reducing the loan tenure, you cut down the compounding effect of interest, ensuring your hard-earned money goes toward repaying the principal rather than servicing interest.

The Bottom Line

Your financial priorities determine whether you should pay less or reduce the period of payment for your home loan. If you want to manage your income levels, you should have lower EMIs while looking at the reduction in interest. For instance, if it’s about minimizing costs and clearing all your debts as soon as possible, then opting for these options can be relevant.

When burdened with this decision, consider one of the following options – reduce the tenure or EMI of your loan. You can weigh between these two options and choose the one that better aligns with your financial goals.

Take action today by applying for a Loan and checking what they can do to help you achieve your dreams with the right financing.

If you want to calculate your monthly EMIs accurately without putting in a lot of mental labour, use an online EMI calculator. This will definitely make calculating EMIs a cakewalk for you.

FAQs

Q.1. Is it better to reduce loan EMI or loan tenure?

A. If your cash flow is tight or you anticipate future financial commitments, reducing the EMI can provide flexibility and ease your monthly financial burden. However, if minimizing the total interest paid over the loan's lifetime is a priority, reducing the tenure is the better option.

Q.2. Is it good to have a long tenure for a home loan?

A. Long loan repayment periods are more cost-effective for the borrower. However, a longer tenure might have a higher interest rate that will eventually increase the cost of the loan.

Q.3. Is it better to increase EMI or go for a prepayment?

A. A good 20% to 25% increase in monthly EMI can substantially reduce your loan tenure as well as the interest cost. Another way is to make the payment in a lump sum amount after an interval.

Q.4. Does prepayment reduce EMI or tenure in personal loans?

A. To lessen your loan’s EMI, consider making part-prepayments after a set number of EMIs. By utilizing extra funds into your loan's principal, you will see a drop in the amount to be paid. This decreases your EMIs and shortens the loan duration.

Q.5. Is it good to increase home loan EMI?

A. Financial advisors suggest increasing the EMIs yearly by a certain percentage as per your saving ability.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com.