With the RBI’s decision to maintain a comparatively low policy rate, availing of credit in India is no longer a hassle. At the same time, one must understand the financial obligation they are taking on, and paying it off is mandatory.
Defaulting on loan repayment can have serious implications. It will adversely affect the credit score and land one in legal trouble. Hence, it is ideal to understand it before going ahead with a loan application.
Factors that determine the loan repayment
To begin with this topic of repayment of loans, the first point to learn here is the factors that determine it, which includes:
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Loan principal amount
The most crucial factor in determining loan repayment is the principal loan amount. Since the total debt is calculated based on this, one needs to consider it first.
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Interest rate
Taking the applicable personal loan interest rate into account is another vital factor in this process. This rate will ultimately determine the total outstanding amount one has to repay.
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Loan tenor
The third point to consider here is the repayment tenor. The monthly instalment of any credit instrument depends on this factor. A point to keep in mind here is that a longer repayment period may reduce the EMIs, but it will increase the total outstanding amount and vice versa.
Here is an example to illustrate this point –
An individual has applied for a personal loan of Rs.5 lakh at an interest of 13% for 2 years. In that case, the breakup will be –
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EMIs: Rs.23,771
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Total interest payable: Rs.70,502
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Total outstanding amount: Rs.5,70,502
Alongside knowing the factors that play a part in determining the repayment of a small personal loan, one should also know about different payment methods to streamline this process better.
Different ways of repaying a loan
Here are some ways one can repay their credit –
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EMIs
EMI or equated monthly installment is probably the most popular repayment method. Every installment here is equal and scheduled to pay over a specified tenor. Moreover, EMIs includes both interest and principal payment.
Since this payment method primarily varies with the tenor selection, individuals can select a favourable one as per their suitability. Borrowers can use a personal loan calculator to learn more.
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Part-payment
Part-payment or part prepayment is another way of loan repayment. Here, borrowers can make a lump sum payment according to their affordability and considerably reduce their total outstanding.
However, a point to note here is that making a part payment reduces the loan’s principal amount. Resultantly, the interest payable also decreases, and so does the total outstanding.
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Foreclosure
Loan foreclosure is another way of repaying credit. Here, individuals can pay off the total loan amount at once, before the tenor. It will help individuals to save considerably on their repayment.
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Bullet payment
Apart from these three, some financiers extend bullet payment options. Here, borrowers need to pay interest every month and the principal amount at the end of the tenor.
Therefore, learning about the available repayment methods is imperative before applying for any credit instrument. Individuals can then choose an option at their convenience. Moreover, with loan refinancing, access to a favourable repayment option and other benefits by shifting the credit to a new lender.
Besides knowing the factors of loan repayment and how to do it, potential borrowers need to learn the importance of this process.
Importance of timely payment of loans
The importance of paying off a loan is associated with reducing your liability and maintaining your reputation as a borrower. Defaulting initially results in penalties and facing legal charges to declare bankruptcy. In comparison, it can have severe implications on your credit report in the long run.
To explain further, repayment failure on a credit report prompts credit rating agencies to reduce an individual’s credit score. Since this rating is essential to get a personal loan for salaried or self-employed individuals, one needs to maintain it to be eligible for credit.
Apart from making timely repayments, there are other ways of improving one’s personal credit score as well.
Besides a clean credit history, timely repayment also helps individuals to maintain a healthy relationship with their lenders and access additional facilities. Reputed financial institutions like Bajaj Finserv extend pre-approved offers to their current customers. Such offers streamline the loan application process and save time. These offers are applicable to financial products like business loans, personal loans, etc. Existing customers can check their pre-approved offers by submitting their essential contact details.
Timely loan repayment is the key to maintaining a strong credit history and avoiding facing any trouble while applying for a loan in future. At the same time, individuals should also be wary of the crucial factors before signing a personal loan agreement.
