Advantages of Prepayment or Part Payment – We name it, The Holiday Plan

To prepay the entire amount early in the tenure or in the later stages is always the best suggestion as you can enjoy the advantages of early closure of your loan, either home or personal.

Prepayment of entire amount might be a bit tricky, part payments can be planned, though. So if we work out on this, we get really a fair picture how advantageous it really is.

Recently RBI had directed banks to stop charging customers for prepayments. Definitely this is one greatest advantage to consider. It is the surely recommended option for personal loans, if you have lump sum money sitting idle.

For instance, if you have a Rs.3,00,000 loan amount taken from next month for 5 years at the rate of 17.5%. Suppose, you wish to pay the outstanding amount, let us see the table of calculations to know the extra amount you can avoid paying.

Year Principal (P)       in Rs. Interest (I)    in Rs. Total Payment (P)+(I) in Rs. Loan paid till date in % Outstanding amount (O) in Rs. Save if you wish to prepay amount O in Rs.
2016 33,774 41,592 75,367 11.26% 2,66,226
2017 47,544 42,896 90,440 27.11% 2,18,681 3,76,833
2018 56,566 33,874 90,440 45.96% 1,62,116 2,86,293
2019 67,298 23,142 90,440 63.39% 94,818 1,95,953
2020 80,068 10,372 90,440 95.08% 14,750 1,05,513
2021 14,750 323 15,073 100% 0 90,440
Total 4,52,200

Consider another illustration with a home loan of Rs. 30,00,000 for 12 years at the rate of 9.5%. Assuming part payment Rs.20,000 will be paid quarterly. Now, look at the table which shows your savings.

Note : Part payment paid anytime will reduce your principal amount.

Loan will close in Total Amount Saved Total EMIs Saved By Paying Number of Part-Payments Total Part-Payment Amount
108 months (Earlier 144 months) Rs.12,59,676/- 36 months Rs.20,000/- each. 35 months Rs.7,00,000/-

Yes, it is no exaggeration.
Save as and when you can without compromising on basic needs apart payment_loanyantrand amenities. Try to part pay your loan at least annually. And see how it works.

To decide which loan to close earlier, ultimately, is an economical trick. If the idle cash in hand earns you less return when kept in a bank or invested elsewhere when compared to the interest you pay on your loan, it is wiser to pay off the loan.

Pay fast and enjoy investing again or plan a holiday with your family.

 

 

*Both the instances are under the assumption of interest rates being constant

3 thoughts on “Advantages of Prepayment or Part Payment – We name it, The Holiday Plan”

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