- What are the benefits that customers can enjoy by paying different loans earlier than the fixed tenure?
- Know about all the benefits when you prepay a Personal loan, Home Loan, Car Loan or Loan Against Property
Individuals face different kinds of needs and require funds to fulfill them. In such situations, a loan is all they need. Lenders provide the required money to borrowers through different loans that they can repay via monthly installments. Every loan has a fixed repayment tenure within which borrowers need to repay. But what if an individual wants to pay the loan early; before it’s pre-decided tenure. Does an early loan payment provide any benefit to borrowers? Do Lenders allow customers to make the early loan repayment?
Well, the answers to both of these questions is a big YES! Lenders allow customers to make an early loan payment with the prepayment facility. This facility allows borrowers to make part or full payment of their loan amount before the fixed tenure. When borrowers do not make a full payment and only a small part of it, it is known as the Part-prepayment. The most impactful benefit of paying a loan early is it can help borrowers in saving the interest amount that they would pay over the loan tenure.
In this post, we will help you understand what are the benefits of the early loan payment and how could this be an important factor in ensuring the maximum savings on your loan. So, let’s start with the case of paying the home loan early.
Table of Contents
Benefits of Completing Home Loan Payments Before the Scheduled Tenure
In our pursuit of knowing the benefits associated with an early loan payment, we are taking Home Loan first. Reason: Home loans are generally considered to be high-ticket purchases and customers take it for a long period ranging from 20 to a maximum of 30 years. So, due to a longer tenure, the interest obligation is bound to be higher despite the affordable home loan interest rates. This is exactly where an early home loan payment via prepayment could help you do so. Customers can make the early payment in parts or full, with the extra fund at their disposal. We are showing some of the benefits of Home Loan prepayment. Please do check.
- The first and foremost benefit of doing an early home loan payment is customers can save a huge interest on their home loan amount. Let’s say an individual opted for a 15-year Home Loan. But after 8 years into his loan, he received a huge bonus at his job and now he has extra funds at his disposal. So, if he makes an early part payment of his home loan, he could save a substantial amount of interest. Let’s understand this with an example.
Suppose Rohan took a 15-year Home Loan of INR 35 lakh at an interest rate of 8.50% per annum.
According to this loan amount, he must be paying an EMI amount of INR 34,466, which would most likely result in an Interest Outgo of INR 27,03,859 if he pays the loan in this vein for 15 years.
Now, let’s say after paying the EMIs for 8 years (96 months) without fail, he wants to make a prepayment of INR 8 lakh to reduce the principal outstanding amount.
At this point, the principal outstanding amount is INR 21,76,359. He has paid interest worth INR 19,85,085 so far.
So, after making the part-prepayment of INR 8 lakh, the new balance will become INR 13,76,359.
So, If he keeps paying the same EMI amount, he would be able to pay this new balance in 47 months i.e. approximately 4 years from now. The interest outgo will amount to INR 2,46,627 over the next 4 years. So, the total tenure would be 12 years (8+4). You can see that with the prepayment facility, he can pay his loan amount 3 years earlier than his fixed tenure. The benefit of making the loan payment over such a reduced period comes with an interest reduction of INR 4,72,147 [27,03,859-(19,85,085+2,46,627)].
- Until you repay the home loan fully, banks hold the ownership rights on the property. So, when you make an early home loan payment, you can be the rightful owner of your home before the fixed tenure.
- Loan Repayment could be stressful at times. By making an early home loan payment, you could feel a bit more financially stable as the loan burden will be lesser than before. Since the principal outstanding balance and interest outgo will reduce, your EMIs will also become lower and you will be easily able to pay them.
- Your prepayment also affects your Credit Score positively. Reason: When you make an early payment of your home loan, your credit report will be updated with the revised principal outstanding balance. And an individual’s creditworthiness depends on the outstanding balance. This is how a prepayment will help increase your credit score.
- The best part about doing an early home loan payment is that lenders don’t ask for any charges from the customers if they have taken a Home Loan at Floating Interest Rates. On the other hand, if the loan is at a fixed rate of interest, lenders usually charge 2-3% of the prepaid amount if the borrower is repaying the loan via refinancing (taking another loan). On using his or her own sources to make the loan payment early, there are no charges though.
|HDFC Limited||On Floating Rate Home Loans:|
For Individuals - Nil
For Non-individuals -
On Fixed Rate Home Loans
|ICICI Bank||Floating Rate Home Loans - Nil|
Fixed Rate Home Loan
|State Bank of India (SBI)||Floating Rate Home Loans - Nil|
|Bank of Baroda||Floating Rate Home Loans - Nil|
|LIC Housing Finance (LIC HFL)||Floating Rate Home Loans - Nil|
Fixed Rate Home Loan -
Personal Loan Prepayment Benefits
Given for a maximum of 5 years, personal loans are one of the most popular options among the customers. The reason being the ability of customers to fulfill their urgent needs without any security. But the unsecured nature of personal loans is also the reason behind the higher interest rates ranging from 11% to 20% per annum. Higher interest rates usually result in higher interest outgo. Do you know that making an early payment of a personal loan could benefit you immensely? This early payment can be in part or full according to the idle cash at your disposal.
We are showing some of the benefits when you pay a personal loan before its tenure. Have a look.
- Personal Loan Interest Rates are usually higher than secured loans. When the interest rates are higher, the EMI amount and Interest Outgo become automatically higher. The interest outgo is usually higher in the early years of tenure. So, when you make a full prepayment during this time, you can save a huge interest outgo with it. Customers can also make the prepayment in parts. Let’s understand how much money you can save by the prepayment.
Let’s say an individual has taken a 5-year personal loan of INR 5 lakh at 12.99% per annum. For this amount, the EMI amount would be INR 11,374 and the interest outgo would be INR 1,82,439.
Now, after 2 years he wants to make a part-prepayment of INR 1,50,000 when the principal outstanding is INR 3,37,615. The new balance would come down to INR 1,87,615. If you keep paying the EMI amount, you can easily pay off the balance before tenure with less interest outgo. Or you can decrease your EMI amount more than before.
On the other hand, you can also make full payment before your fixed tenure. This will help you save more on your personal loan.
- If you are unable to make the payment of the outstanding principal balance, you can also make multiple part payments during your tenure that will bring your overall balance down as well as your EMI amount. Though some lenders do have conditions regarding the number of part payments a customer can make. But while doing it, you should keep the prepayment charges in mind.
- A full prepayment also affects your credit score positively. The reason: when you make a full prepayment, your outstanding balance becomes Nil which reflects on your Credit Report. So, always go for a full prepayment if your finances allow you to do so.
- If you have multiple loans (other loans than personal loans), it would be advised to always make early payments of personal loans. With it, customers can save on the interest outgo as a personal loan has higher interest rates as compared to other loans.
|State Bank of India (SBI)||Nil - 3% of the Principal Outstanding Balance + GST|
|HDFC Bank||Nil - 2.50% of the Principal Outstanding Balance + GST|
|YES BANK||Nil - 4% of the Principal Outstanding Balance + GST|
|ICICI Bank||5% of Principal Outstanding Balance + GST|
|Standard Chartered Bank||1% - 5% of the Principal Outstanding Balance + GST|
Benefits You Get by Paying the Car Loan Early
Car Loans are given to customers for a maximum of 7 years so that they can purchase their dream vehicle. But customers can pay off the loan amount before the completion of the tenure with the help of a prepayment facility. Customers can make the prepayment either in part or full according to their convenience. But what are the benefits a customer can enjoy by paying the car loan amount earlier than the pre-decided tenure? Well, we are showing some of the prominent ones. Check them out!
- The first benefit is customers don’t need to pay the monthly installments anymore if they have made full payment of their outstanding balance. On the other hand, if customers have made a part payment, their EMI and interest outgo will reduce drastically.
- Banks don’t release the hypothecation of your vehicle until you have fully repaid your loan. So, when you make the early repayment of your car loan, you get the full ownership of the car. After getting the ownership of your car, you can easily sell your car if you want to. Until the full repayment of your loan, you cannot sell your car.
|Axis Bank||5% of the Part Payment amount|
|ICICI Bank||5% on principal outstanding or interest outstanding for the remaining period of the loan (whichever is lower)|
|Bank of Baroda||Customized|
Advantages of Paying the Loan Against Property Earlier than the Decided Tenure
A Loan against property allows customers to get the required loan amount by putting their property as collateral. Individuals can also get higher loan amounts as lenders provide upto 65-70% of the property value. This Loan-to-value (LTV) ratio tends to vary from one bank to another. Some banks provide upto INR 10 crore as the loan amount. Lenders also provide the Prepayment facility with which customers can pay the loan amount before the fixed tenure. Here are some of the benefits that you can enjoy.
- When you prepay the loan amount, your principal balance reduces. You can either reduce your EMI amount or you can reduce your tenure than before by paying the same EMI amount. You will save interest outgo in both cases. But the payment will be less when you keep the same EMI after part-prepayment.
- As Loan Against Property is a secured loan, you get back the ownership of your property that you pledged as the collateral by making an early loan payment.
- Prepayment of your loan against property can improve your credit score. Reason: the lesser your outstanding balance, the more creditworthiness you have.
|Axis Bank||3% of the Outstanding Principal Amount + GST|
|Kotak Mahindra Bank||Nil Charges for loans given at Floating Rates|