In India, a ‘loan’ is considered to be a hassle. Once a loan is taken ‘on your head’, then it must be repaid within the stipulated time; and if finances allow, even prepay. Risk aversion, an important part of traditional financing advice, has its own advantages as well as disadvantages – much like loan prepayment. Although this anxiety to pay the debts off before time might bring mental peace to the borrower, the financial benefits of pre-payment depend on several other factors.
Factor 1: When you prepay your loan
If your finances are looking good or there has been an unexpected influx of money, you might consider repaying your debt before its time. However, it is financially beneficial only if you do it in the earlier stages. This is because you save more on the overall interest payout if you pay sooner. However, most NBFCs have a lock-in period of one year. Only after this period can you fully pay the entire outstanding amount. During this lock-in period, a better part of the interest cost will be paid by you.
Factor 2: Pre-payment charges
Another important thing to consider is the pre-payment charge levied by your provider. Most NBFCs charge between 1%-4% of the outstanding amount. In case you are charged a penalty for pre-payment, compare the amount you save with the cost of pre-payment and then proceed.
In conclusion, one must remember that although the terms of pre-payment are one of the most ignored, they are crucial to consider before you seal the deal on your home loan.
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Tips to ensure your EMI payments are on time:
Time the EMI near your salary date
You can schedule your EMI date to a few days after your monthly salary is credited, so that you never miss out on the payment due to lack of funds. Plan your expenses with the remaining amount, left after you have paid your EMI. This way, you can ensure that no additional charge is imposed on your home loan account for non-payment of dues.
Make regular part payments
Making part payments helps you to reduce your home loan liability faster. You can use your annual bonus as well as maturity proceeds from insurance policies to make a part payment for your home loan.
Example: For a home loan of Rs. 30 lakh with a 20-year tenure and 9% rate of interest, your EMI amount will be around Rs. 27,000. Along with paying the EMI, if you pay an additional Rs. 21,000 every year, your home loan will be paid off in 18 years instead of 20. You will save around Rs. 4.1 lakh this way, since you have eliminated the surplus cost of interest.
Pay more than your EMI
If you can manage to pay an additional amount over your actual Home Loan EMI amount, it will help you to repay your home loan faster in the long run.
Example: Consider the aforementioned example. If you pay an additional Rs. 2,500 every month, then your home loan can be repaid in 16 years, a whopping four years before its original tenure.