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25 MAY, 2021
Today, with leading banks and financial institutions, you can instantly apply for loans online. Once you avail a loan, it should be your prime responsibility and priority to repay it within the stipulated tenure. Also, as your income increases with time, you can consider prepaying the loan to reduce the debt burden and save on the interest payout.
So, what is the loan prepayment facility and how does it work? Scroll down and find out.
Prepayment of Loan
The prepayment facility allows the borrower to repay the loan amount before the actual repayment tenure ends. Be it a business loan, personal loan, or home loan, borrowers can opt to prepay the loan amount in part or full as per their convenience.
The example below will help you understand how loan prepayment works.
Let’s consider you have availed a home loan of Rs 20 lakh for a tenure of 20 years at a rate of 9% p.a. With the help of a home loan EMI calculator, you would be able to get the EMI estimate, which would be Rs 17,995.
Now, consider that you make a part-prepayment of Rs 1 lakh. By using a home loan prepayment calculator, you can easily calculate the revised EMI. All you have to do is enter the details such as the loan amount, tenure, rate of interest, and the prepayment amount in the calculator. After a part-prepayment of Rs 1 lakh, the revised EMI will be Rs 17,905. This would mean a reduction of Rs 900 or 5% on EMI savings.
There are certain parameters you must consider before prepaying the loan. Some of them are mentioned below:
Things to Consider Before Loan Prepayment
Evaluate Your Finances
You must evaluate your financial condition well in advance before prepaying the loan. It is advisable to go-ahead with prepayment only if you are financially ready. In case you prepay the loan without having sufficient funds, you may end up sacrificing on your lifestyle and basic needs.
Don’t Prepay Loan in the Later Stages
Banks and financial institutions usually levy some prepayment charges if you wish to foreclose your loan. Therefore, if you are close to the end of the repayment tenure, continue with EMI payment to close the loan. This is because opting for prepayment of loan and paying the prepayment charges won’t be prudent if you aren’t saving enough on interest payout. If there is no prepayment charge levied by the bank, then this will not be applicable.
Calculate Your Savings
Before opting for home loan prepayment, you must calculate the difference between prepayment charges and future interest saved. It is advisable to prepay the loan only if the amount saved is high.
Do Not Surrender on Tax Benefits
Under Section 24 of the Income Tax Act, the interest portion of the EMI paid for home loan can be claimed as a deduction from your total income up to a maximum of Rs 2 lakh. In case you are availing tax benefits on a home loan, it is not advisable to opt for prepayment and surrender the tax benefits.
How to prepay your loan
Use the following tips to work towards loam prepayment.
Accumulate monthly savings
Start saving a small amount every month for prepayment. It could be as small as Rs 2,000. Once you have saved enough money for a few months or years, you can use it for partial prepayment. The combined savings can help you reduce your outstanding balance significantly.
Utilise surplus funds
You can utilise surplus fund received during different occasions. It could be the yearly bonus, incentives, or a salary hike. You can also use your monetary gifts received during festivals or yearly occasions to do prepayment.
Loan prepayment can bring major financial relief to you. By making the most of the above-mentioned tips, you will be able to take a well-informed decision regarding whether or not to opt for loan prepayment. Lastly, make sure that you note the prepayment charges levied by the bank beforehand, if applicable. This will help you avoid any inconvenience later.
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