Opting to prepay?

By BankBazaar.com | March 13, 2014
prepaying your loan

Prepayment

She had always wanted to pay off her debt and did not want to depend on volatile market conditions and wait ages before the property became her completely her own with no stake in it for the bank. Of course while she was paying her loan, she did not have to worry too much about availing maximum tax rebates possible on her salary, as the loan took care of it.

Asha’s hard work paid off. She directly passed her CA foundation course, not having to spend three years acquiring a B.Com degree, went on to clear her CA exams in her very first attempt with flying colours and was placed comfortably in Ford Automobiles.

She traveled the globe visiting all global Ford offices, spending a month or two at each location, practically living out of a suitcase. She hardly spent about 4 months in a year at the posh rented apartment in Chennai, where Ford’s headquarters was situated. She felt it was a waste of money to pay out so much for rent and decided to purchase a home at the first opportunity.

Now, she is about 10 years into the loan and her income has increased four times to what she was initially earning. Though she felt the pinch of alarming interest hikes, still it was well within her income and she managed to make enough through stocks and shares and was lucky enough to make her profits days before the market crashed.

She now had a lump sum with her, and was wondering what to do with it. Over the years she had made some prepayments within the permissible limits to try and save on interest as much as possible, when interest rate hikes happened frequently over the past couple of years.

She had always wanted to pay off her debt and did not want to depend on volatile market conditions and wait ages before the property became her completely her own with no stake in it for the bank. Of course while she was paying her loan, she did not have to worry too much about availing maximum tax rebates possible on her salary, as the loan took care of it.

Market conditions were not stable currently, more interest hikes were due. This seemed liked an ideal scenario to prepay. However, what if currently market conditions seemed more stable and interest rates were being slashed and things looked bright for the loan market in future? Under such circumstances should she still prepay? Yes, by all means she should.

Even if there was a scenario, when the interest rates are hiked or slashed it is not going to drastically come down to her original floating interest rate at which she initially purchased her home loan. Also, tax rebates should never be considered as a priority, when you could save quite a bit of money on the interest paid out for the home loan. There are other options to save tax, which you can avail but when it comes to saving on interest, prepayment is a good option to choose, when you have the funds in hand.

Of course, you should consider if the prepayment fee still allows you to save the maximum interest possible, which in all probability it will. If so, Asha should go ahead, utilize the lump sum she has with her to close the loan earlier than planned. It would be in her best interest to do so.

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.

4 thoughts on “Opting to prepay?

  1. Personal Loan

    This article made this concept a lot easier to understand. I think this is definitely something to look into if you get in that situation.

    Reply
  2. admin

    Thanks for dropping by Bruce and it great to know you enjoyed the read…

    Cheers

    Reply
  3. MKS

    The story mostly led my imagination to keep wondering what Asha did finally….prepaid the loan or not?? The article should have concluded ..perhaps with a little bit of calculation to clarify the benefits.

    Reply

Leave a Reply

Your email address will not be published.