You know what they say about loans: clearing them quickly is your first step towards building wealth. Sure, loans can help you create assets and wealth, but lingering outstanding debts can be a financial burden that slows you down in your quest for financial independence.
Therefore, any surplus money should not only be used for savings and investments but should also be used to clear your debts.
Additional Reading: How to clear debt using the snowball method
This is a good time to prepay
This is the right time to make partial prepayments towards your loans, especially your Home Loan, since interest rates have been falling over the last couple of years. And with inflation currently under control, they are likely to stay low in the short term.
When you prepay when interest rates are low, you clear a part of your debt at a rate that may be cheaper than the rate you had borrowed at. Such prepayments will help you remain financially strong when interest rates start trending upwards in the future.
Additional Reading: How To Plan Home Loan Prepayment
How it can help you save money
The longer you sit on a loan, the higher you are going to have to pay in terms of interest. By accelerating your debt repayment, you can save a lot on interest since a significant part of the EMIs you pay towards clearing a loan goes in paying interest.
Many Home Loan products don’t penalise prepayments, which gives you more incentive to make a dash for it. The table below gives you an understanding on the amount of money you can save through prepayment.
|Analysing Loan Repayment Options|
|Option||Loan Amount||Interest Rate (Pa)||Tenure Remaining||Total Interest Payable*||EMI*|
|A||Scheduled EMI and tenure||Rs. 10 Lakh||10.00%||5 years||Rs 2.75 Lakh||Rs. 21, 000|
|B||Same EMI and reduced tenure||Rs. 10 Lakh||9.00%||4 years 10 Months||Rs. 2.37 Lakh||Rs. 21, 000|
|C||Lower EMI and same tenure||Rs. 10 Lakh||9.00%||5 years||Rs. 2.45 Lakh||Rs. 20, 700|
|D||Increased EMI and reduced tenure||Rs. 10 Lakh||9.00%||4 years 4 Months||Rs. 2.11 Lakh||Rs. 23, 300|
|* Approximate figure|
As the tables suggests, a borrower gets maximum benefits when he opts for an additional payment above the EMI amount and closes the loan earlier than scheduled.
Additional Reading: Get A Sweet Deal When Prepaying Your Personal Loan
How to clear your debts early
Repaying a long-term debt requires financial discipline. If you’re looking to prepay on your loan, you can consider avenues that will increase your savings, such as cutting down on lifestyle expenses. Any surplus such as performance rewards, holiday bonuses, etc. should be used for the same purpose.
You could talk to your banker to bring down your interest rates by switching from the base rate to MCLR or moving your loan from your bank to another. You could also divert funds from a low-yielding investment instrument towards your loan.
Having a budget in place can help you keep your spending under control, thus helping you to put your money to good use. A debt paid off in time or before time will only increase your Credit Score, thus improving your chances of getting loans in future.
Hopefully, this should convince you to strike while the iron is hot and go about preparing to prepay your Home Loan as soon as possible. It could certainly be to your advantage.