NEWS & ADVICE : HOME LOANS
Prepayment on loans: 'To do or not to do'
By Joseph Samson
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Prepayment

If the borrower starts paying 1 additional EMI per year, i.e Rs. 45,113 distributed evenly across existing EMIs, his/her resultant EMI comes to Rs. 48,873, in that case

Total Interest paid : Rs. 48,42,540
Total Principal Paid: Rs. 38,50,661
Total Sum = Rs. 86,93,201

The above figures were calculated using Amortization tables available with the loan contract, and can be arrived at for any loan.

 

Total Benefit

If the borrower pays off the loan in the 14th year then by increasing just one EMI per year, he would have saved 6 years of repayment tenure along with Rs. 21,34,018 which is a large sum. Even if the bank charges a penalty of 2-3% on the balance amount, the borrower stands to pay an extra Rs. 64,020. Even after which he/she stands to save about Rs 20,70,000.

Decision


Opportunity costs should be kept in mind by the borrower while taking any such decision. If one can find a investment avenue which offers higher rate of return (example ELSS) than the interest rate of the loan, it is advisable to consider investing in that security, but such investments are bound to risk as against the risk free returns on prepayment.

 


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