21 May, 2018 Home Loans
There is no denying the fact that any kind of debt is not good for the financial health of an individual. Whether it is a personal loan, vehicle loan, overdue credit cards or even a home loan.
There is no denying the fact that any kind of debt is not good for the financial health of an individual. Whether it is a personal loan, vehicle loan, overdue credit cards or even a home loan, it is always advisable that a customer should always be wary of his re-payment track record and should focus on clearing his/her debts as early as possible. Home loan especially is a product that is designed for longer tenures say, 20 to 30 years but still current trend says that on an average, home loan tenures do not go beyond 8 to 10 years and there is a reason behind this. Though banks/NBFCs design their products such that they could increase EMI affordability for customers by increasing the loan tenure, since; longer the tenure, less is EMI, but another point to be kept in mind is that longer the tenure, more is the interest that is paid over the years as Rate at which bank has offered the loan is still the same. Thus, it is by far clear that a customer must try to repay his/her loan as early as possible so as to avoid paying larger sums as interest.
Till now, we have talked about repayment of the loan as per the designed re-payment schedule made by banks. But is there a way to repay the loan amount at a much faster rate? The answer is yes! The way it is done is known as Pre-payment or Part Pre-payment. Pre-payment means paying an additional amount, over and above the regular EMIs to reduce the principal outstanding. Banks and NBFCs used to charge a certain percentage of the total outstanding principal as pre-payment charges but now even that is been restricted by latest RBI guidelines, hence making it more easy for customers to make part pre-payments. Although, banks/NBFCs still have a certain locking period before which pre-payment is not possible, generally this comes down to 6 months but may vary as per financer’s policies.
Factors to keep in mind before going for Pre-Payment:
Many times customers are confused whether to utilize their surplus amount in pre-paying a loan or to keep that money for investment purpose. Well, it’s not that difficult to arrive at the right conclusion. One only needs to analyze the returns from his/her investment versus savings from pre-payment. Suppose a customer, say Ravi, gets an annual bonus of Rs. 3 lakhs, Ravi is in a dilemma whether to use that money to pre-pay his existing home loan or to utilize that money to invest in popular investment tools like Mutual Funds, FD, Post Office Savings Scheme or PPF. Now in any of these options, an annual return would be not more than 8.5%. Hence, Ravi would be able to make an annual return of Rs. 25,500 /- . now let’s consider another option where Ravi decides to pre-pay his loan amount. if Ravi makes pre-payment towards his loan, then he will save Rs 30,450 p.a. towards Home Loan interest. Thus it is wise for Ravi to choose pre-payment instead of investing the surplus amount in other investment tools. But at the same time, if Ravi can invest somewhere where he can get better returns, say 10%, which would be more than what he is being charged as home loan Rate of Interest, it will be wiser to invest that surplus amount to get better returns.
Another question that generally hovers over the minds of customers while making re-payments, is that whether they should be considering lowering their home loan tenure or EMI amount. Although, reducing EMI may look as a lucrative option as one wants to reduce the monthly financial burden from his pockets, but still choosing shorter tenure is always better for the same reason as stated above, less is tenure less is the overall interest payable towards the loan.
Some important suggestions:
1. If you have multiple loans running, which loan should you choose to pre-pay first? Well, obviously the one with higher ROI (Rate of Interest)
2. If you have received a surplus amount, please ensure that you keep a certain portion of it for emergency purposes also, don’t just jump directly to pre-pay debts.
3. Its an opportunity loss for Banks/NBFCs when a customer pre-pays his/her loan, thus banks tend to make this process less easy for customers, it is advisable to carry all documents along with you while going for pre-payments along with the checkbook, as you will be asked to pay interest due for current month.
4. Last but not the least, don’t forget to collect you unused security cheques that are kept with the bank/NBFC.