Personal Loan EMI: How much interest will you have to pay on a ₹5 lakh loan? Understand the full calculation..
Personal Loan EMI: Getting a personal loan has become quite easy; if the need arises, the funds can be credited to your account within a few hours. However, the true financial implications become apparent only after the EMI payments begin. Since personal loans do not require collateral, they carry higher interest rates. Consequently, even on a smaller loan amount, you may end up paying a significant amount in interest over a long tenure.
Let’s understand this using the example of a ₹5 lakh personal loan. We will assume an annual interest rate of 12%, though this figure can vary based on your CIBIL score and income. Now, let’s look at the interest payable if this loan is repaid over tenures of 2, 3, 4, and 5 years.
Repayment in 2 years
If a loan of ₹5 lakh is taken for a tenure of 2 years, the EMI will be approximately ₹23,537. Paying this EMI for 24 months means a total payout of about ₹5.65 lakh to the bank, with the interest component amounting to roughly ₹64,882. In short, while a shorter tenure results in a higher EMI, the overall interest burden remains significantly lower.
Repayment in 3 years
Now, let’s extend the loan tenure to 3 years. The EMI drops to approximately ₹16,607. The total repayment over 36 months comes to about ₹5.98 lakh, with interest totaling around ₹97,858. This means that repaying the loan in 3 years instead of 5 can save you approximately ₹69,000 in interest.
Cost over a 4-year tenure
If the same ₹5 lakh loan is repaid over 4 years, the EMI will be around ₹13,167. The total amount paid to the bank during this period would be approximately ₹6.32 lakh, with interest accounting for about ₹1.32 lakh. Essentially, extending the tenure to lower the EMI leads to a higher total interest cost.
Repayment over 5 years
Finally, let’s consider the longest tenure. For a loan tenure of 5 years (60 months), the EMI would be approximately ₹11,122. This is the lowest EMI among the four options. However, there is a cost involved; over the 60-month period, you would pay the bank a total of around ₹6.67 lakh, with interest alone accounting for approximately ₹1.67 lakh.
**Longer Tenure Means Higher Interest**
**Tenure** | **EMI** | **Total Payment** | **Interest**
2 years | ₹23,537 | ₹5.65 lakh | ₹64,882
3 years | ₹16,607 | ₹5.98 lakh | ₹97,858
4 years | ₹13,167 | ₹6.32 lakh | ₹1.32 lakh
5 years | ₹11,122 | ₹6.67 lakh | ₹1.67 lakh
**Don't Exhaust Your Entire Savings Just to Save on Interest**
It is important to keep one thing in mind here: while paying off a personal loan early can be beneficial, it is not wise to put your entire savings into it. You should retain funds for essential household expenses and an emergency fund. These savings will prove useful in the event of sudden job loss or income-related issues.
If you wish to close an existing loan ahead of schedule, check the bank or NBFC's terms and conditions. In some cases, prepayment or foreclosure charges may apply, which could slightly reduce your actual savings.
Disclaimer: This content has been sourced and edited from Money Control. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.
