When you borrow a loan, you must check the interest rate charged and the repayment period. Loan repayment is one of the most critical aspects of borrowing a loan. Repaying the debt amount on time and interest charged has multiple benefits on your credit report and CIBIL score and helps you borrow more loans in the future. Not repaying a loan on time, due to any reason, can lead you to an additional fine being charged and also a lower CIBIL score along with a negative impact on your credit report.
If you are looking forward to borrowing a loan or have borrowed a loan and wish to know more about your loan repayment and how it benefits you, you have landed at the right place. In this article about loan repayment, we will look at the various aspects of repaying a loan. We will discuss the advantages of paying back a loan on time and the negative effects of not doing so. We will discuss different types of loans and loan repayment meaning. We will also look at different types of loans and how repayments can be made for the same.
In this article about repayment of loans, you can read about various topics related to loan repayment and how repaying your loans on time can benefit your credit health. You can read about the following topics in detail in this article:
Table of Contents
Loan Repayment Meaning
When you borrow an amount as a loan from a bank, a loan provider or a moneylender, an interest rate is charged on the same. The loan amount and the amount calculated as interest have to be repaid within a specified period by the lender. The payment of the entire sum of money can be made in parts through the entire duration of the repayment tenure or in full at once. The repayment of loan includes the principal amount borrowed and the amount calculated as the interest rate charged.
Understanding How Loan Repayment Works
Different loan repayment methods can be fixed by the borrower or lender depending on various factors such as the type of loan borrowed, the amount borrowed, and the financial institution’s internal policies. Before we look at the types of loan repayment methods, we must understand how loan repayment works. In this section, we will be helping you to understand how loan repayment works so that you know this step of borrowing a loan better.
Equated monthly instalments or EMIs are used to repay the loan that a client has borrowed from a bank, a loan provider or a money lender. The bank calculates the EMI and is to be paid at regular intervals, mostly a month, by the borrower. The EMI is the sum of the principal amount and the interest amount. The EMI is not equal parts of the borrowed amount and interest amount. In the initial stages of repayment of loan, the interest component of the EMI is larger compared to the principal amount component. In comparison, in the later stages, the borrowed amount component is greater than the interest component. Your loan provider also fixed the amount you pay as part of the principal component and interest component.
Let us help you understand loan repayment with an example. Suppose you borrow a loan of Rs. 20 lakhs. The interest rate charged by your moneylender is 10%, and the loan has been offered for a tenure of 10 years. The following will be the amount you repay in total and as EMI every year and every month:
Total Interest Amount: Rs. 11,71,618
Total Repayment Amount: Rs. 31,71,618
Monthly EMI Amount: Rs. 26,430
Annual EMI Amount: Rs. 3,17,162
Your loan provider or bank share the details of the interest and principal amount to be paid each month using an amortisation table. This table also has an entire schedule of the payment of the loan amount.
Now that we have looked at loan repayment meaning and how loan repayment works, let us move ahead and take a look at the methods for loan repayment and the advantages of repaying a loan.
Why Is Loan Repayment Important?
If a loan borrower repays the loan on time and does not miss any monthly payments, he can avail of many benefits. On the contrary, missing loan payments and not being able to repay a loan on time can land you in trouble and make borrowing a loan in the future a difficult task. In this section, we will be looking at reasons for repayment of loan and how a timely loan repayment impacts your credit health positively.
Adverse Effects Of Missing Payments And Not Repaying The Loan On Time
- The loan provider will charge late payment fees and penalties, and you will have to pay an extra amount.
- The interest rate charged on the loan amount can be increased in an unsecured loan.
- Default status will be assigned to your account.
- Lower CIBIL score and negatively impacted credit report.
- Legal proceedings if the loan provider decides on taking legal action on the matter.
- Issues in applying for a loan in the future and reduced eligibility.
Positive Effects Of Timely Repayment Of Loan
- It helps in improving CIBIL scores and getting a higher CIBIL score.
- Improves the credit report.
- Ensures easier loan approval in the future.
- You might as well have the upper hand in negotiating interest rates in the future.
We have now looked at the various aspects related to the repayment of a loan. Let us now move ahead and find out the types of loan repayment methods to ensure timely payments of loans.
Types Of Loan Repayment Methods
A loan amount that you borrow from a bank or loan provider, or moneylender can be repaid in two different ways. You can use the following methods for repaying the loan amount along with the interest amount:
- EMI: As discussed above, EMIs have equated monthly instalments and are the most common method of repaying different types of loans. EMIs are calculated by the loan provider such that an equal sum has to be paid by the borrower every month. The amount has two components- principal and interest amounts, which do not comprise equal parts. The borrower can also get away with the loan by making a pre-payment in case the lender allows or paying a pre-payment fee for doing the same. Pre-payment of your loan can be done in two different ways:
-Partial Pre-Payment or Part Pre-Payment
-Full Pre-Payment or Pre-Closure - Bullet Repayment: Various loan providers allow borrowers to repay the loan by choosing the bullet repayment method. Using this method, the borrower pays only parts of the interest component every month and repays the entire principal amount at the end of the repayment tenure of the borrowed loan. A bullet repayment is also considered a single debit balance on loan, and such repayment method is usually used for gold loans and a few different business loans. The payments made by the borrower over the loan repayment period can be small and variable amounts that are adjusted as the interest component of the loan, and the principal amount has to be paid in a single payment at the end of repayment tenure.
Now that we understand the types of loan repayment methods, we must look at how the borrower can repay different types of loans.
Loan Repayment Methods For A Personal Loan
A Personal loan is one of the easiest loans that a person can borrow. This loan is offered without pledging collateral or submitting any documents. The interest rates are usually low, and the repayment tenure is also shorter. A personal loan can be used for a wide range of purposes without specifying the reason for borrowing to the loan provider. A personal loan can be repaid via monthly EMIs calculated and set by the moneylender. The different methods of repayment of personal loan EMIs are:
- Post Dated Cheques or PDC Method
- Electronic Clearing System
- Direct Debit Method
- Salary Debit Method
- Direct Payment Method
Personal loans can be prepaid completely, but most loan providers do not allow partial pre-payment of personal loan EMIs.
Loan Repayment Methods For A Home Loan
People borrow home loans to buy their own homes, as owning a home is an important milestone in their lives. Home loans are secured debts, and often the purchased home is pledged as collateral against the loan amount being borrowed. There are 5 different methods using which a home loan can be repaid. You can choose the repayment method at your convenience, or your loan provider will specify the type of repayment method.
- Regular/Fixed EMI Repayment: This method is similar to the EMI payments of every type of loan, and a fixed amount specified by the lender has to be paid every month by the borrower.
- EMI Moratorium: to get a gap period between borrowing the loan and starting to pay the EMIs, the borrower can opt for a moratorium period of up to 5 years. The borrower makes a nominal payment towards the interest component during this period.
- Step-Up Repayment Plan: The amount paid as EMI is lower at the beginning of the re-payment period and increases gradually throughout repayment.
- Step-Down Credit Repayment Plan: This home loan repayment method is also known as an adjustable rate plan. This method is exactly opposite to the step-up plan, and the initial EMIs are comparatively higher and reduced in amount towards the ending of the repayment tenure.
- Pre-EMI: If you are buying a property that is under construction, then you can choose this method; the principal amount is released by your bank or loan provider in parts. The interest is to be paid only on the amount disbursed by the lender.
Loan Repayment Methods For An Education Loan
Students borrow education loans to pay the tuition for their dream colleges and complete courses that will land them high-paying jobs. An education loan can be paid in EMIs. For education loans, the moratorium period is for a year after the course is completed or 6 months after securing the first job, depending on which happens first. After this period is over, the borrower can repay this loan in regular monthly instalments. The borrower can also make regular payments or pay lump sum amounts during the moratorium period. The best part about an education loan is that it can be entirely pre-paid at any point of time during the repayment period.
The loan provider also allows an extension of the loan repayment tenure if the college increases the course duration under any circumstances.
Frequently Asked Questions
For your convenience, we will look at some frequently asked questions by loan borrowers regarding the repayment of loans and answer the same.
1. What are loan repayments?
Paying the loan provider or moneylender the borrowed principal amount along with the interest rate charged in parts at regular intervals is known as loan repayments.
2. What are the types of loan repayment?
There are two types of loan repayment methods that are majorly in use:
- EMIs
- Bullet Repayment
3. How do I repay my loan early?
You can pay off your loan amount before the repayment tenure ends if your loan provider allows the same. If not, you might be charged an additional pre-payment fee for the same.
4. How to repay an education loan?
You can repay your education loans in EMIs. An education loan can be repaid in regular or lump sum payments through the loan tenure. It can also be pre-paid for free at any time.
Conclusion
We hope this article has helped you understand loan repayment better for your loans and the loans that you will borrow in the future. Understanding repayments can be complex, but it is important to make all your payments on time for a better credit report and a good CIBIL score.