Taking a loan is a long term commitment that can go on for multiple years. In case of home loans, you end paying a huge chunk of your income as EMIs for decades. Even your personal and car loan can go for as long as 7 years. However, you can reduce the burden of your EMIs and close your loan early with the tips.
Let us dive in!
Pre-payment of loan
Your cost of loan increases with an increased rate of interest. Let us take an example here:
Suppose you have taken a home loan of Rs 50 lakh for 20 years at the rate of interest of 9% per annum. To service this loan, you will end up paying Rs 57.96 lakh of interest at a monthly EMI of Rs 44,986. That's over 1.07 cr! More than double the amount.
However, if you decide to pre-pay 5% of the loan amount after 5 years; i.e. Rs 2.21 lakh, it will help you reduce your loan tenure by around 18 EMI. It will also bring down your total interest at Rs 52.26 lakh. You would end up saving more than 5 lakh on interest only.
Hence, it is essential to make periodic pre-payments on your loan whenever you have cash. Also, make prepayments when interest rates are falling to clear your loan at a lower interest rate.
Pre-close your loan
You can pre-close your loan if you have sufficient funds in your hand. A home loan doesn't carry any pre-payment or pre-closure charges. However, some banks charge pre-payment and pre-closure fees for car and personal loans. Factor in the charges if any, and if you think you would be able to save money on interest then it makes sense to make the payment of pending dues in full and pre-close your loan.
Pay higher EMIs
You may increase the EMI of your loan as you grow professionally. With increased income, you can pay larger chunks of your loan on a monthly basis. You can request your lender to hike your EMIs periodically by up to 10% every fiscal year to close your loan at a faster pace.
Transfer your loan to a lender offering a lower interest rate
You can also consider transferring your loan to another bank offering a lower rate of interest. However, you might have to pay processing fees and a portion of your loan amount. Consider these factors to calculate your benefits before transferring the loan.