From 20 Years to 12: How a ₹10k Salary Hike Can Close Your Loan Faster?

A salary hike is often seen as an opportunity to improve one's lifestyle. However, using the extra income smartly for your loan can save you lakhs in interest payments. Instead of reducing your EMI burden, applying the additional income to cut your loan tenure drastically reduces total repayment. An EMI calculator can help compare both scenarios quickly.

Example Scenario

A borrower taking a home loan of ₹40,00,000 at an interest rate of 8% p.a. for 20 years would have a monthly EMI of ₹33,458. 

Over the 20-year tenure, the total repayment amounts to ₹80.30 lakh, out of which ₹40.30 lakh is paid as interest alone, almost equal to the principal borrowed. This shows how long loan tenures significantly increase the overall interest outgo, despite the comfort of lower EMIs.

Case 1: Sticking to 20 Years

If the borrower continues with the 20-year tenure:

• EMI = ₹33,458
• Total repayment = ₹80.30 lakh
• Interest paid = ₹40.30 lakh

Even though the EMI looks affordable, half of the total repayment is just interest.

Case 2: Reducing Tenure to 12 Years After Salary Hike

Suppose the borrower’s salary increases by ₹10,000 per month. They decide to use the extra income to reduce loan tenure by increasing EMI instead of just enjoying extra cash.

If the tenure is reduced to 12 years (144 months), the revised EMI increases to ₹43,298 as per the EMI calculator. 

With this adjustment, ₹22,34,927 lakh is the interest and the total payable will be ₹62,34,927. This means the borrower saves around ₹18 lakh in interest compared to the original 20-year plan, making it a smarter option for those who can manage higher EMIs after a salary hike.

By paying ₹10,694 more each month (₹44,152 - ₹33,458), the borrower saves:

• Tenure reduced by 8 years
• Interest saved = ~₹18 lakh

Why Use an EMI Calculator?

An EMI calculator helps simulate different tenure and EMI combinations instantly. By adjusting the monthly outflow to reflect your new salary, you can see how much interest you save and how fast you can close your loan.

Also Read: How Parul Used an EMI Calculator to Plan Her ₹12 Lakh Education Loan?

Conclusion

Using a salary hike to shorten your loan tenure is a powerful wealth-building strategy. Though your monthly EMI rises, the long-term gain is massive, saving over ₹18 lakh in this example. Instead of spending the additional income on lifestyle upgrades, using it to cut down your loan tenure can help you achieve financial freedom much earlier.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.