Loan: Taking a loan fulfills your goal. It is your responsibility to repay the loan on time. But it is also important to get rid of the loan quickly, so that you can take advantage of your income and income without any worries, if you are repaying the loan quickly then you can also face penalty, let us know in the news the ways to avoid this. about .
Taking a loan is a good option to buy a house or car or to deal with big expenses like children’s higher education. However, with the loan comes the headache of paying the installments for many years and the interest charged on it. A large part of the salary is spent in paying those installments.
Due to this, many people think of repaying the loan as soon as possible. So that we can get relief from the interest charged every year. Just as a penalty has to be paid for missing EMI, similarly a penalty has to be paid for repaying the loan early and sometimes this penalty is equal to or even more than the interest charged on the loan.
What is prepayment penalty?
Whenever a loan is approved, it is also decided for how long the loan is being given and how much EMI the lender will have to pay on it. The tentative interest is also added according to the period for which the loan is fixed, that much interest will have to be paid on the loan.
When you repay the loan early, the bank or the loan granting authority does not get as much interest as they expected. To cover this they charge prepayment penalty. So that they can get adequate returns against the loan. However, not all lenders impose this penalty.
This penalty is written in the terms and conditions of the loan. Some lenders charge fixed penalty and some charge it on percentage basis. Therefore, before signing the loan documents, read its terms and conditions and understand what will happen if you repay early or how much penalty will be imposed if there is a slight delay.
How to calculate whether it is right to repay the loan early or not?
If there is no mention of prepayment penalty in the terms of your loan, then there is no risk in repaying the loan early. If you repay the loan early, you will get rid of the interest charged on it every year and you will not have to pay any fine. If there is a prepayment penalty, then first calculate how much penalty will be charged if you repay the loan early. After this, calculate how much interest you may have to pay on the remaining loan. Now subtract the penalty from the interest. The answer will be, you will be able to save that much by repaying the loan early. But in this the value can also be negative and both can also be equal. The decision has to be taken on the basis of this answer only.
If there is good savings in interest, then you can decide to repay the loan early. At the same time, if the value is negative, it means that you will incur loss in repaying the loan early, that is, it would be better to repay the loan only on its pre-determined tenure.
The third condition is of neither benefit nor loss. In this case, you can become debt free before time by repaying the loan. In this case, the second and comparatively better option is to repay the loan within its stipulated duration only, because there is no benefit in repaying the loan early. Apart from this , you can invest the extra money you have in mutual funds or FD or any other saving scheme for wealth building .
Generally, while taking loan, people choose the option according to their financial condition. Such an option in which they do not face any problem in paying EMI . Generally people do not plan to repay the loan quickly, but sometimes they think of repaying the loan with the sudden money coming from some property or investment. In such a situation, it is important to read the loan terms carefully and calculate them carefully before taking any decision.
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