In modern times, loans have become a common aspect of our lives, especially as we embark on our careers and pursue independent living. Taking loans can be financially sensible on various occasions. For instance, when setting up a home, instead of renting and using regular income to cover rent expenses, it often makes more practical sense to buy a home with the aid of a loan. This way, the money that would have gone towards rent can now be utilized to pay the Equated Monthly Installments (EMIs), effectively turning an expenditure into an investment. Two strategies that help in reducing the total interest payout are part payment and pre-closure (also known as prepayment) of the loan.
What does Part-Payment of a Loan mean?
Part-payment of a loan refers to the act of a borrower making a partial repayment of the outstanding principal amount using surplus funds. This reduces the unpaid principal, leading to a decrease in the EMIs and the overall interest paid. It is essential to make a substantial lump sum part-payment to fully reap the benefits of this repayment strategy. By reducing the principal amount, part-payment effectively lowers the interest charged, thereby lightening the overall EMI burden. It is advisable to opt for part-payment whenever there are surplus funds available, as it is a straightforward and effective way to minimize interest costs. However, borrowers need to be aware of any prepayment charges set by the bank or lender, as these charges may impact the savings gained through part-payment. Part-payment of a loan involves using surplus funds to make a partial repayment of the outstanding principal amount. By doing so, the borrower reduces the unpaid principal, leading to lower EMIs and overall interest payments. To maximize the benefits of part payment, it is crucial to make a significant lump sum payment. This strategy is particularly helpful in reducing interest charges, lightening the overall EMI burden, and saving money. However, borrowers should be cautious about potential prepayment charges that could affect the actual savings achieved through part-payment, as some banks or lenders may impose such charges.
Understanding Loan Prepayment:
Prepayment of a loan offers the flexibility to repay a portion or the entire loan before the designated tenure ends. Typically, most banks permit prepayment of the outstanding principal amount after one year, providing an opportunity to save significantly on interest. By choosing to prepay, borrowers not only reduce their interest burden but can also clear their debt sooner. Some banks and lenders may even incentivize prepayment by offering value-added services, such as a free trading account or a zero-balance savings account. However, it's essential to be aware that certain banks may levy a prepayment penalty ranging from 2% to 5% on the outstanding principal amount. Online EMI calculators prove helpful in understanding the financial implications, as they estimate loan costs and potential savings with the prepayment option. Recently, the Reserve Bank of India (RBI) issued instructions to banks not to charge any penalty for the pre-closure of loans. Nevertheless, this amendment is applicable only to loans with floating interest rates, and fixed-rate Personal Loans are not covered by this rule.
What is Loan Pre-Closure?
Loan pre-closure, also known as foreclosure, involves paying off the entire outstanding principal amount of a loan in a single installment before the loan term's scheduled end. This legal process is highly beneficial as it significantly reduces the borrower's interest liability and allows for early closure of the loan account. To initiate a loan pre-closure, the borrower must submit an application to the respective lending institution or bank. The lender then calculates the foreclosure balance by considering the total outstanding obligations, the remaining loan term, and the interest paid. Upon satisfactory calculations and payment of the determined amount, the borrower can settle the loan and close the account. In the case of Personal Loans, most lenders typically impose a one-year lock-in period, meaning prepayment is allowed only after this period. After making the prepayment, it is essential to obtain a "No-dues" certificate and retrieve original documents from the bank or lending institution as evidence of loan settlement. In certain circumstances, the bank or lender may initiate loan foreclosure when the borrower faces difficulties in repaying the loan and defaults on EMIs. In such cases, the lender may resort to auctioning the borrower's collateral to recover the outstanding loan amount, ultimately resulting in the foreclosure of the loan account.
Numerous lenders present appealing loan choices, but borrowers often aim to clear their debts as soon as possible. Prepayment and foreclosure options provide them with opportunities to achieve early debt freedom and save on interest. By directing their surplus funds into their loan accounts, borrowers can effectively decrease the outstanding loan amount, leading to reduced EMIs or shorter loan tenure. Visit Loans Paradise to know more!
