Loan prepayment refers to repaying your loan before the tenure. Depending on your financial standing, you can do it in parts or bulk. However, prepayment of loans have to be done in a very disciplined way. It may seem like a difficult task in the beginning, but if you wait for a windfall, which most borrowers do, then you may never be able to prepay your loan. The best approach to repay a loan is to do it in parts.
While prepaying your loan can help you save a lot, the lender has to forego the interest they thought they would receive. Many lenders charge an extra amount or fees if you repay your loan before the tenure.
So, if you have prepayment plans in your mind, choose a lender who doesn’t charge extra for prepayment. You can also transfer your loan from your current lender to another lender if your present lender charges for prepayment.
You do not need to wait for a huge availability of funds to prepay your loan. You can start as soon as you have surplus income in your hand. People in their 20s and 30s repay their home loans within seven to nine years. This is due to promotions, bonuses, and incentives they earn during their growing career, which help them have surplus income, and in turn, prepayment of the loan becomes easy.
If you keep on waiting for the total amount that you need to repay, the interest will keep on accruing. The sooner you start prepaying, even if the amount is small, the principal will keep going down, which will decrease the interest component, and thus your EMI will reduce.
If you are thinking of prepaying your loan, don’t miss out on your EMIs. If you maintain healthy financial terms with the lender, when you ask about prepayment, they may offer you a lesser interest rate, reducing your EMI. In both cases, you become the winner.
When the purpose is to save and grow your wealth, you can also consider and compare your investments against the amount you will prepay. If you can earn more by investing the amount you used for prepayment, you should instead invest and earn more.
When you are finally going to prepay your loan, carry all loan documents with you to avoid discrepancies and unnecessary delays in processing the prepayment.
If you have surplus money, and it can help you get rid of the burden of paying EMI every month, use it wisely. However, prepayment must be planned and carried out with utmost discipline.
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