Loan Repayment Plan You Need to Know

Loan repayment is an important part of borrowing. It concerns returning money to the party from whom it was borrowed within a specific period. To effectively manage your financial obligations, it's essential to understand the various methods available for loan repayment.

Each repayment method offers distinct advantages and may be more suitable depending on individual circumstances. Let's explore the concept of loan repayment, discuss the different types of repayment methods available, and highlight the key features and benefits of each method.

What is Loan Repayment?

Loan repayment means returning the borrowed funds to the lender over a specified period. When individuals or businesses take out a loan, they agree to repay the principal amount along with any accrued interest and fees. Loan repayment generally happens in uniform instalments. It can be quarterly, monthly, or as per a predetermined plan.

The repayment amount is calculated based on the loan amount, interest rate, and the chosen repayment term. Adhering to the agreed-upon repayment plan is important to maintaining a good credit history and assuring the loan is repaid completely within the specified timeframe.

How Does Loan Repayment Work?

Loan repayment works by the borrower making regular payments to the lender to repay the borrowed funds. Here's a step-by-step look at how the process typically unfolds:

1. Repayment Schedule

The borrower and lender agree on a repayment plan specifying each payment's amount and frequency. This schedule ensures both parties are clear on when and how much needs to be paid at each interval.

2. Principal and Interest

Each payment includes a portion that goes towards the principal amount borrowed and another portion for the accrued interest on the outstanding balance.

3. Amortisation

In most cases, loan repayments follow an amortisation schedule, where the payments are structured to gradually reduce the outstanding balance over time. That means the early payments are interest-heavy, while later payments cover more of the principal.

4. Payment Methods

Borrowers can make repayments through different methods, such as checks, bank transfers, or automatic deductions online payments, from their bank accounts.

5. Timely Payments

Borrowers must make their repayments on time to avoid penalties, late fees, and potential damage to their credit score.

Also Read: Personal Loan Pre-closure: Benefits, Disadvantages & Charges

6. Completion of Repayment

Once all scheduled payments are made, the loan is considered fully repaid, and the borrower no longer owes any outstanding amount.

Advantages of Loan Repayment

Loan repayment offers several advantages to borrowers, including:

1. Debt Reduction

Repaying loans enables borrowers to slowly reduce their overdue debt, bringing them closer to financial freedom and improved creditworthiness.

2. Financial Discipline

Regularly repaying loans instils financial discipline. It also helps borrowers develop budgeting and responsible spending habits.

3. Interest Savings

Timely loan repayments can result in interest savings over the loan term, reducing the overall cost of borrowing.

4. Improved Credit Score

Consistent loan repayments contribute to a positive credit history, leading to an improved credit score, which can help secure better loan terms in the future.

5. Peace of Mind

Repaying loan commitments offers peace of mind and relieves financial stress, enabling borrowers to focus on other financial priorities and goals.

Does Repaying Loan Affect CIBIL Score?

Absolutely! Loan repayment significantly affects your CIBIL score. Punctual and complete repayments indicate responsible financial behaviour and reliability, build a positive credit history, and increase your CIBIL score.

Conversely, late or missed repayments harm your CIBIL score, indicating higher credit risk, lowering your score, and making it harder to obtain credit in the future. Honouring repayment commitments is important for preserving a good credit score and accessing favourable credit terms.

Step-by-Step Guide to Calculate Your Loan Repayment

Calculating your loan repayment involves several steps:

1. Determine the Loan Details

Gather information about your loan, including the principal amount, interest rate, and loan term.

2. Identify the Loan Repayment Formula

Understand the formula used to calculate loan repayments. Common formulas include the fixed monthly payment formula and the amortisation formula.

3. Calculate the Monthly Payment

Plug the loan details into the formula to calculate the monthly payment amount.

4. Consider Additional Costs

These costs include additions, like insurance premiums or fees, that could be included in the loan.

5. Use a Loan Repayment Calculator

Utilise online loan repayment calculators that simplify the calculation process and provide accurate results. These tools are user-friendly and can help you plan your finances accordingly.

Types of Loan Repayment Methods

Understanding the different types of loan repayment methods available can help you choose the best one for your needs. Here are two common methods:

1. EMI (Equated Monthly Installments)

• Part-Prepayment: This allows you to pay an extra amount towards the principal, reducing the overall loan tenure and interest.
• Foreclosure: This involves repaying the entire outstanding loan amount before the end of the loan term, thus saving on future interest payments.

Also Read: What is EMI?

2. Bullet Payment

This method involves repaying the entire loan amount in a single lump sum at the end of the loan term. It's often used for short-term loans or specific types of financing like certain business loans.

Final Word

Loan repayment is a crucial aspect of managing your financial obligations. By understanding the different repayment methods and their benefits, you can make informed decisions that best suit your financial situation.

Whether you opt for regular EMIs, part-prepayment, foreclosure, or a bullet payment, adhering to a disciplined loan repayment schedule can help you achieve financial stability and improve your creditworthiness.

Remember, timely and consistent repayments are key to maintaining a good credit score and securing favourable loan terms in the future.