Some loans are long-term commitments. Repaying home loans especially can go on for decades. Even car and personal loans can drag on for 5-7 years. EMIs can take out a big chunk of our monthly income. Surely there has to be a way to reduce your EMI burden over time. Wouldn’t it be nice to be done with the loan as soon as possible? Yes, of course. There are several ways to taper down your loan payments over time. Here’s a look at some easy methods.
Pre-pay Your Loan
The higher your loan interest, the more the cost of your borrowing. If you take a home loan of Rs 50 lakh at 9% for 20 years, your total interest over the full loan tenure will be Rs 57.96 lakh. Your EMI is Rs 44,986. In all, you will repay Rs 107.96 lakh – more than twice the amount you had borrowed, not assuming interest rate fluctuations which are a given. Let’s say that after 5 years of repayment, you decided to pre-pay just 5% of the loan balance of Rs 44.35 lakh – or Rs 2.21 lakh. This pre-payment is worth approximately 5 EMIs. However, this reduces your loan tenure by nearly 18 EMIs, bringing down your overall interest payment to Rs 52.26 lakh. Therefore, periodically pre-pay your loan to lower your long-term interest costs and to get out of debt early. You should especially look to pre-pay when the interest rates are falling. This would help you clear off a portion of your debt at a lower interest rate, which is more impactful than pre-paying while your interest rate is comparatively higher.
Pre-close Your Loan
If you have liquidity in hand, you can go for a loan pre-closure by repaying the loan balance along with any pending dues. Normally, in a home loan, there are no pre-payment or pre-closure charges. However, for personal loans and car loans, there may be a charge the value of which varies from one lender to another. Take the charges into account while calculating the full cost of pre-closure.
Loans With EMI Waiver
From time to time, we’ve seen loan offers where the borrowers are rewarded for consistent timely repayment. The reward is the waiver of a certain number of EMIs towards the end of the loan. While such an offer seems attractive on paper, there’s no such thing as a free lunch. You may want to check how the lender is offsetting this discount. It’s possible that such loans carry a higher interest rate than regular loans.
Increase Your EMI
Your income may increase with time whereas your EMI will remain more or less the same over the tenure of a loan. Therefore, you can allocate your income hike towards the pre-payment of your loan. You can ask your lender to periodically increase your EMI – let’s say by 5-10% for every financial year – so that you can increase your repayments in order to settle your loan sooner.
Negotiate With Lender For Lower Rates
Banks may sometime not reduce the interest rate of your loan in line with policy rate changes. For example, the Reserve Bank of India may cut the repo rate by 50 basis points whereas your lender may pass on only 20 basis points from this cut. You must maintain contact with your lender and negotiate your loan rates. Sometimes, the lender may apply a charge to process the rate reduction.
Transfer To A Loan With Lower Interest Rate
Lastly, if your loan interest rate isn’t in sync with market realities, you should consider moving to another bank or lender offering a lower rate. For the loan transfer, you may have to pay a processing fee along with a portion of your loan balance (typically around 1% of the balance). Always weigh the cost of the loan transfer against the interest rate benefit. If the interest rate difference is small (under 10 basis points), the transfer may not make a massive difference to your savings weighed against the transfer charges.
(The writer is CEO, BankBazaar.com)