How to Efficiently Plan Loan Repayment?

Personal Finance

The loan repayment is a process where you repay the loan to the lender within the specified period of time, as mentioned in your loan agreement. With tools like EMI calculators available for customers to use, you can efficiently plan your loan repayment within the specified tenure. If you are struggling with your monthly expenses, it’s time to revisit your loan repayment plan and make some changes. Let’s get started!

How does a Loan Repayment Work?

If you opt for an EMI or a bullet payment for your credit repayment, the amount is deducted from your bank account automatically each month on a given date. While applying for the loan, you must provide the bank account details that you want the EMI to be deducted. An Electronic Clearing System or ECS enables loan repayments.

In case of prepayments, you can say that the options for repaying are net banking services, cheques, or DDs as per the loan provider’s guidelines.

Ensure that the necessary EMI amount is available in the bank account before the due date every month. If the ECS bounces, the borrower is liable to pay a late payment fee. This fee is as per the guidelines mentioned in the loan sanction letter.

When you apply for any loan, you need to consider a few factors that will help you budget repayment carefully:

1. Your Monthly Income and Expenditure
You need to factor in mandatory expenses like rent, food, other EMIs, education fees, etc. This will help you choose a loan with an EMI that fits your budget to make repayment easier.

2. The EMI Payable
EMI or equated monthly instalment refers to the monthly credit repayment that you need to make towards the loan. This depends on the principal amount and the interest rate.

3. Tenure of the Loan
Also known as the term of the loan, this is the time that you have for repaying the loan. The higher the tenure, the lower the EMI. However, early repayment loans are a better choice as you can save on making payments towards the interest.

Effective Ways to Repay an Existing Loan

Understanding how to repay your loans effectively will not only save time but also help in saving money. Given below are some ways you can use to repay your existing loans:

1. Debt Consolidation

If you have several loans to repay, the interest on the loans will pile up and become more expensive. Therefore, a smart way to deal with this is to consolidate all your debts into a single loan against property. This will allow you to pay off all your loans in one go. 

2. Repay Loan with Your Savings

You can use the funds in your savings bank account to repay your loan. If you have a number of debts, you must first focus on clearing the debt with the highest rate of interest.

3. Pre- or Part-payment to Close the Loan Earlier

You must always try to prepay some part of your loan apart from paying your EMIs. This will help in repaying most of the principal amount that will help in reducing the interest. This will make your loan repayment more affordable and less time-consuming. However, you must be aware of the penalties associated with prepayments. 

4. Reducing the Tenure

You must try reducing the tenure of your loan once your income increases. This will increase the EMI amount but will cut down the rate of interest. 

Different Types of Loan Repayment via EMI

There are different ways by which a borrower can repay a loan by using EMIs. One can choose any of the repayment methods discussed below as per their repayment capability:

1. Regular EMI Payment

In this method, the whole amount you need to repay will be divided into monthly instalments that will include the interest and the processing fees. This is the standard form of EMI payment that is followed by most lending institutions. 

2. Delayed EMI Payment

In this system, you do not have to pay any EMI for a certain period of time at the beginning of the repayment tenure. This period is known as the moratorium period. This period can be fixed to a few months or even a few years. However, a fixed amount needs to be paid during the moratorium period as per the terms and conditions of the agreement.

3. Step Up Repayment

In this method, the EMI amount increases with time. The repayment amount is lowest during the initial years and it increases as the years pass by. This would be useful if you expect to earn a significant amount of money in the future. 

4. Step Down Repayment

This is the exact opposite of the step up repayment method. In this method, the repayment amount is highest during the initial years and tends to decrease as the repayment tenure progresses. This is helpful for those who are expecting an early retirement or a decrease in their future earnings. 

5. Foreclosure of Loan

By this method, the borrower can pay a lump sum amount after paying a specific number of EMIs to close the loan. However, one must be aware of the terms and conditions of the lender before foreclosing a loan as this may attract some penalty charges.

Loan Repayment Options for Housing Loans in India

There are different options that borrowers can use to repay home loans in India. They are as follows:

1. EMI Payment Beginning from a Later Date

In this format, banks offer the borrower the opportunity to start paying the EMI from a later date. This is called the moratorium period, which can be of around 36 to 60 months. 

2. Increased EMI Payment

In this system, you are required to pay a higher EMI amount after a certain period of time. The interest increases proportionately with the increase in your income. Paying higher EMIs helps in lowering the burden of the interest and helps to close the loan earlier.

3. Linking Loan Account with Idle Current Account

By using this format, you can link your current account with the loan account for repaying your loan. The interest liability of your loan will come down as per the surplus balance in your current account. You can even deposit or withdraw money from your current account.

4. Decreased EMI Payment

This system allows you to pay higher EMIs in the initial years that will subsequently decrease in the later years. This helps in early repayment of the loan by paying the major amount of the loan during the first few years.

5. Longer Repayment Tenure

Borrowers can opt for a long repayment tenure to improve their repaying capability. However, the age of the borrower is a factor that is considered by lenders before they offer longer repayment tenures. 

6. Waiver of EMI

If you diligently pay all the EMIs regularly, certain banks offer EMI waivers. Interest rates will be similar to normal loans in such cases, except the tenure for this loan has to be 20 years.

Benefits of Repaying the Loan on Time

Here are a few reasons why planning your repayments properly is important:

1. Avoid Late Payment Charges: Overshooting the due date on personal loan repayment attracts late payment charges.

2. Avoid Losing Assets: When you fail to make payments on secured loans for a long time, the bank can deem you as a loan defaulter and as a consequence could resort to selling your assets to recover the loan.

3. Avoid Legal Issues: The bank may file a suit when you fail to make your personal loan repayments as per the conditions provided in the loan sanction letter. 

How Missed Loan Repayments Could Affect Credit Score?

Repaying loans on time helps you maintain a good credit score. Even if your credit score is low currently, making timely credit repayments will help you improve it.

Every time you default on repaying the loan, details are sent to the credit bureau. This reduces your credit score, making it harder for you to get approval on any future financial assistance.

Getting a loan or a credit card is highly recommended if you have the repayment capacity. This helps you open up your credit score. Remember, even a NIL credit score does not allow you to secure any financial aid. As long as you keep repaying the loan as per the guidelines provided, you will be able to maintain a good credit score.

Also Read: What Should Be Your Credit Score For Home Loan

Final Word

A timely loan repayment helps you to manage your monthly budget and also helps in improving or maintaining your credit score. You can choose to pay using different options that are available to you to repay the loans. The interest rate on the repayment amount depends on the eligibility criteria fulfilled and varies with each applicant. 

FAQs on Loan Repayment

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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.