Step-up and Step-down EMI for two-wheeler loans: Know the difference

When you settle for a step-up EMI for your two-wheeler loan, the repayments would be lower initially. The EMIs would be higher towards the end. A step-down EMI plan is just the opposite, where the borrower aggressively clears larger EMIs in the initial months to enjoy financial ease toward the end.

The flexibility of repaying a two-wheeler loan goes a long way in planning your finances. When you apply for a motorcycle loan with a reputed bank or NBFC, it’s natural to look out for convenient loan EMI options. You wouldn’t like to financially stress yourself, right? 

This is where the concept of step-up and step-down EMI comes into play. Taking any type of loan requires you to financially plan for the long term. So, it’s logical to consider your financial stature and opt for the right loan repayment plan.

In this article, we are going to discuss step-up vs step-down EMI for two-wheeler loans.

Step-up vs step-down EMI: What’s the difference?

Step-up and step-down EMI options for motorcycle loans involve variable EMIs that are methodically spaced out throughout the loan tenure. Banks and NBFCs offer flexible loan repayment options so that you remain financially at ease. 

In the case of step-up two-wheeler loans, the EMI remains low in the initial months. Gradually, the EMI amount rises as you near the end of the loan tenure.

When you decide to settle with a step-down EMI, the repayment amount remains high initially. You end up paying lesser amounts as you move closer to the loan closure date.

What is a step-up motorcycle loan EMI plan? How does it work?

A step-up two-wheeler loan EMI requires the borrower to increase the EMI component with ease passing month during the loan tenure. So, you start by paying a small EMI and then increase the EMI payout as you reach the middle of the loan tenure. Your EMIs would be the highest as you near the last month of the loan repayment period.

The lender recovers the EMI in pieces when you select the step-up loan EMI option. The borrower doesn’t experience a loan burden during the initial years. As the months pass and the borrower gains financial stability, the person is better poised to clear off larger EMIs. During the initial months, the EMI doesn’t include the interest. Rather, it includes only a part of the principal amount. As you continue to clear your EMIs, the interest component is added to the principal, thereby resulting in higher repayments.

When banks and NBFCs configure loan repayment options, they design the EMI schemes in different phases. Thus, if your salary keeps increasing over the months, a step-up EMI for your two-wheeler loan would ensure the ease of your financial outflow.

Advantages and disadvantages of step-up EMIs

Advantages

• In the initial years, the loan EMI would be lower. As a result, the chances of getting the two-wheeler loan approved are higher.
• When you pay more interest on EMI at the end of the loan tenure, you become eligible for tax benefits.
• In case you are at the early stages of your career and expect your salary to increase, step-up loans would be the right choice.

Drawbacks

• Banks and NBFCs design step-up EMIs by assuming that the borrower will enjoy an increment in income in the coming months. However, if the borrower’s salary remains constant or decreases, repaying the loan would turn out to be a challenge.
• The borrower might overlook the effect of inflation while calculating the growth in salary.
• When you compare step-up vs step-down EMI, the former results in more cash outflow.

What is a step-down motorcycle loan EMI plan? How does it work?

A step-down repayment plan for your two-wheeler loan EMI involves a more aggressive approach to clear off your debt. Under these plans, the EMI component starts higher at the initial stages of the loan tenure. Gradually, as you proceed toward the middle or end of the term, you end up paying less amounts.

When you choose a step-down EMI plan for your motorcycle loan, the interest keeps decreasing over time. The term ‘decreasing rate loan’ is also used to define this type of loan EMI option. Since you would be paying off a larger part of the loan amount initially, the interest component would decrease throughout the loan tenure. Therefore, you can save interest when you go for a step-down EMI plan. 

Advantages and disadvantages of step-down EMIs

Advantages

• The prime benefit of a step-down EMI is the savings you can make on the interest. Since you would be clearing maximum debt at the initial stages, the interest on the principal would be low later on.
• If you are financially sound, a step-down EMI would be a better choice. This loan repayment plan helps borrowers become eligible for other loans faster.
• A step-down loan helps in planning your finances with future expenses on the radar. The faster you clear your ongoing liabilities, the earlier you can visualize your long-term financial goals.

Drawbacks

• Since the initial loan repayment amount would be higher, some borrowers might find it financially stressful.
• Due to the predetermined repayment structure, step-down EMIs are less flexible.
• If you opt for a variable rate interest for your two wheeler loan and it increases, you might end up paying higher-than-calculated amounts towards the end.

Wrapping up

Now that we have discussed step-up vs step-down EMI, you are well-informed to compare your loan EMI options. Which loan EMI regime would suit you better?

A step-up EMI would be ideal for you if your income or salary increases each year. Individuals who are at the initial or middle stages of their careers should go for this type of EMI.

A step-down EMI would be suitable for people nearing their retirement years. As the liabilities decrease toward the end of the loan tenure, the borrower would enjoy greater financial freedom.

Depending on your financial stature and income, you can now decide your two-wheeler loan EMI structure. Look out for low-interest loans from reputed banks and NBFCs offering flexible repayment terms.