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Personal loan comes under the category of unsecured loan, whose interest rates range from 10.50% to 18% or even more per annum. When a person takes a personal loan of ₹5 lakh to ₹10 lakh for 5 years, along with repaying the principal, he pays lakhs of rupees to the bank only in the form of interest.
Heavy EMIs charged every month not only impact the monthly budget but also limit future savings and investment opportunities. If the loan is repaid with a well-planned strategy, a 5 year loan can be repaid in 2 to 3 years and lakhs of rupees on interest can be directly saved.
The following 5 financial strategies prove to be most effective in speeding up the loan repayment process:
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1. Pay only one extra EMI every year: Normally there are 12 EMIs in a year. If you pay just 1 additional EMI (i.e. 13 EMIs in a year) once a year from any of your savings or incentives, the 5 year loan gets over by about 9 to 12 months and the total interest payable comes down by 15% to 20%.
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2. Increase EMI by 5% to 10% annually: As your salary increases in your job (appraisal) or profits in business increase, increase your EMI amount by 5% to 10% in the same proportion. This additional amount is deducted directly from your principal balance, thereby reducing the compounding interest faster over the remaining term.
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3. Part-Payment from Bonus, Tax Refund or PF: Whenever you get Diwali bonus, annual incentive, tax refund or maturity fund, invest it in loan part-payment instead of wasting it. Part-payment made in the first 12 to 24 months of loan origination saves the most interest as a major part of the EMI goes towards interest in the initial period.
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4. Select Balance Transfer option: If you have taken a loan at a higher rate of 15% or 16% and your credit score (CIBIL Score) has now improved above 750, then you can transfer your loan to another bank at a rate of 11% to 12%. Low interest rate reduces the EMI or the entire loan gets paid off in less time.
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5. Lump Sum Settlement from Foreclosure: As per RBI rules on floating rate personal loans, no foreclosure penalty can be charged from individual borrowers if you have sufficient liquidity. Even in fixed rate loans, closing the loan by paying nominal charges is much cheaper than paying huge interest in the coming years.
Suppose you have taken a personal loan of ₹5,00,000 at 14% per annum interest rate for 5 years (60 months):
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Regular EMI: Approximately ₹11,634 per month
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Total interest in 5 years: Approx ₹1,98,048 (Approximately Rs 2 lakh interest only)
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Impact of Strategy: If you make a lump sum part-payment of ₹30,000 to ₹40,000 every year, your loan will be fully repaid in about 38 to 40 months instead of 60 months and you will be able to save net interest of over ₹70,000 to ₹90,000.
Whether you are availing a personal loan from Lucknow, Kanpur, Delhi, Jaipur or Mumbai, be sure to read the terms and conditions of your bank’s ‘loan agreement’ before making the prepayment or part-payment.
Make sure that the extra amount deposited by the bank is transferred directly to your account. Principal Amount (Principal Outstanding) It is being adjusted against the EMI and not being kept as advance for the upcoming EMI. Along with this, after complete closure of the loan, it is mandatory to check the No Objection Certificate (NOC / No Dues Certificate) from the bank and the status updated as ‘Closed’ in the CIBIL records.