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How to Do Loan Terms

How Do Loan Terms and Interest Rate Affect the Pace of Home Loan Repayment?

Every home loan borrower wants to close the home loan snappily. After all, you truly enjoy your house once you have repaid the entire home loan.

How Does the Home Loan Quantum Go Down?

We know how loan mathematics works. utmost home loans are reducing balance loans.
With reducing balance loans, a portion of EMI goes towards interest payment and the rest goes towards top prepayment.
Now, the interest element depends on the interest rate and the outstanding star. And since the outstanding star is advanced during the original times, the interest element of the EMI is also high. Since the interest element is high, the top prepayment element is low. That’s why the star outstanding goes down veritably sluggishly during the original times.

Gradationally, as the top outstanding goes down, the interest payment element of EMI comes down and top prepayment becomes brisk.
Then’s a breakdown of the amortization schedule of a Rs 50 lacs loan at 8 for 20 times.
At the end of the 1st time, indeed though you have paid 5 of EMIs, your star outstanding will go down by 2.1.

The Longer the Tenure, the Gradational the Decline in Outstanding star
As Anticipated. When the term is longer, the EMI is lower.
For case, The EMI for a Rs 50 lacs loan at 8 will be as follows for these tours.

  • 20 times Rs 41,822
  • 25 times Rs 38,590

The EMI is lower for the longer term, but the interest cost is the same since the starting start and interest rate are the same. therefore, if the term is longer, an indeed bigger portion of the EMI goes towards interest payment. And less towards top payment. Hence, the top goes down sluggishly.
For case, for a 20-time loan, you repay Rs 8,489 of the top quantum in the first month.
For a 25-time loan, you repay only Rs 5,257.
Then’s the amortization schedule for Rs 50 lacs loan at 8 for 20 times.

The Advanced Interest Rate, the Gradational Decline in Outstanding star
Again, as anticipated. Everything being the same, if the interest rate is advanced, a bigger portion of EMI’ll go towards the interest payment and lower towards top prepayment.

Rs 50 lacs loan for 20 times.
At 8 sire EMI is Rs 41,822. In the first month, top prepayment = Rs 8,489
At 9 sire EMI isRs. 44,986. In the first month, top prepayment = Rs 7,486

The below analysis is with the supposition that the interest rate won’t change during the term. As the interest rate goes up, the top prepayment would decelerate.

Expedite Loan Closure through Overpayments

Your home loan is closed when the star outstanding goes down to zero. You can let home loans run down at their own sweet pace. Or you can aggressively reduce stars by making regular overpayments. The calculation behind overpayments is veritably clear.
originally, the outstanding star goes down by the repayment quantum. Secondly, lower loan quantum outstanding = Lower interest element of EMI = Advanced top element of EMI. This sets off a domino effect.

For case, in a Rs 50 lacs loan at 8 sires for 20 times, the loan outstanding at the end of the 1st time will be Rs48.94 lacs. 228 months still left in the loan. However, the loan gets repaid in the coming 182 months(an aggregate of 194 months), If you compensate the loan by Rs 5 lacs at the end of 1st time. You save an aggregate of 46 EMIs.
also, given the way the loan mathematics works, the sooner you compensate, the more you’ll save.
For case, if you were to compensate the loan by Rs 5 lac at the end of the 5th time( rather than the 1st time), the loan will finish in an aggregate of 205 months. You save 35 EMIs.

The Most Introductory Rule of All

An 8 loan( assuming no change in interest rate) remains an 8 loan irrespective of how or if you make any overpayments. The yearly payment( EMI) is fixed. The interest element depends on the interest rate( let’s say 8) and the top outstanding.
You make a repayment. star outstanding goes down. Coming month, the interest element will be lower because the top outstanding has gone down. But you still pay 8 on the reduced star. Overpayments don’t change the overall cost of your loan.

By making overpayments, you only reduce the nominal( absolute) interest outgo. This might give you the print that you have saved on interest. Yes, you have but you could have invested the repayment quantum and earned returns. However, you would have been better off than compensating, If you earned further than 8 on your investment. Classic compensates or invests question. still, let’s not go there.
The intent isn’t to suggest whether home loan repayment is a good or bad choice. This is just to disband the notion that you save on interest costs. You save only the nominal interest costs. The chance cost of a loan doesn’t change because of repayment.
Home Loan repayment is easily a simpler choice. Whether investing( rather than compensating) would have been a better choice or not? This can only be known in hindsight.
Product Innovation
Home loans don’t have to be reduced balance loans. There’s no nonsupervisory demand. There are loan products similar to Axis Quick Pay where you pay an equal quantum of star with each yearly investiture. With similar loans, the loan outstanding goes down at a brisker pace than the original times. At the same time, the yearly payments are also high in the original period.

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