A loan can be a boon to those who need financial help and availing a loan automatically implies that it should be repaid along with the decided interest rate. Read to know what loan repayment is and how it works.
Returning the loan amount borrowed to the lender is known as loan repayment. But first, let us take a look at what loans are.
A loan refers to a sum of money that is lent by banks, NBFCs or other lenders to a borrower with the intention of receiving it back with interest over a period of time. Loans can be secured or unsecured. Secured loans are those that require a collateral or security in order to be disbursed. For example, if you wish to avail a home loan, the house in question will be in the lender’s name until the loan has been fully repaid.
Unsecured loans are those that do not require collateral or security for disbursal such as personal loans.
The act or process of repaying the borrowed amount to the lender is known as loan repayment. When a lender provides a loan to a customer there is inherent risk involved. In order to mitigate this risk, an interest rate is imposed on the loan. The customer will have to pay back the loan in installments known as EMIs or Equated Monthly Installments. EMI consists of a portion of the principal amount that is borrowed along with interest amount.
Basically, EMI = Principal Amount + Interest Amount
It is interesting to note that the principal amount and interest amount are not equal in an EMI, in fact during the initial loan repayment period, the interest amount will be higher and will reduce as the repayment term progresses and the principal amount increases. Additionally, the EMI amount can also be fixed or floating. Fixed EMI payments are when the amount to be paid does not vary during the loan repayment term. When it comes to floating (also known as variable or flexible repayment) options, the EMI amount may vary depending on the market value and other fluctuations.
Everybody’s financial status and requirements will vary including their loan repayment abilities. There are a number of different types of loan repayment methods available in the market today.These include-
In this case, the borrower need not have to pay loan EMIs for a set period of time at the start of the repayment tenure. Also known as moratorium period, this option can be availed from a few months to a few years. However, a predetermined amount may have to be paid during the moratorium.
In this plan, the EMI amount decreases as the repayment term progresses. This means that the installment amount will be high in the initial years and is great for those looking to retire soon or those who are expecting a reduction in their income with time.
As opposed to the previous option, in a step-up repayment plan, the EMI amount increases with time and will be less in the initial years. If you are somebody who is expecting a large income in the future then this repayment plan might be good for you.
In this time of repayment plan, a lump sum can be paid after a certain number of EMIs have been paid to completely repay the loan amount. However, this option is subject to terms and conditions and may even result in the borrower having to pay a penalty.
Given above are just a few of the repayment options available. However, borrowers must keep in mind that the repayment term will vary based on the type of loan that is being availed, the lender’s terms and conditions, and other factors. Not every type of loan can be paid off by using the above repayment options.
As mentioned previously, your EMIs will be paid over a certain duration of time and an amortization schedule or table is extremely important in this regard.
A table of all the periodic loan payments made over the repayment term showing the amount of interest as well as principal amount that is a part of each payment is known as amortization schedule. Generally, early on in the loan repayment schedule, a major part of the EMI will be the interest amount and later on the principal amount will make up a majority of the payment.
Let us understand this better with an example.
Personal loans are one of the most popular loans that are availed by applicants today. For. eg, Mr. Amit borrowed Rs.5,00,000 from a popular lender at an interest rate of 8% for a repayment term of 2 years. His personal loan amortization schedule will look like this -
| Year | Opening Balance | Interest | Principal | Closing Balance |
|---|---|---|---|---|
| 2021 | Rs. 5,00,000 | Rs. 20,603 | Rs. 1,37,689 | Rs. 3,62,311 |
| 2022 | Rs. 3,62,311 | Rs. 19,898 | Rs. 2,51,466 | Rs. 1,10,845 |
| 2023 | Rs. 1,10,845 | Rs. 2,227 | Rs. 1,10,841 | Rs. 0.00 |
The total interest to be paid is Rs. 42,728 while the EMI amount is Rs. 22,614 per month.
If you wish to find out your EMI schedule, you can easily do so using EMI calculators available online. All you need to do is use the slider to provide the amount you wish to borrow, the interest rate imposed, and the repayment tenure of your choice.
Availability of a loan is an act of responsibility as it is understood that the amount will have to be repaid. There are a number of loans available in the market today with differing terms and conditions. Customers will have to choose a loan that suits their requirements and ensure that the loan repayment is done on time. If you are looking for a personal loan at competitive rates and advantageous terms and conditions, visit the Money View website or download the loan app to apply today.
When repaying a loan, borrowers are responsible for paying back both the principal and interest that have accrued. These repayments entail a planned series of EMIs spread out over a certain time period in order to fully reimburse the lender.
Loan repayment is the act of paying back the lender the amount of money you have borrowed and the interest generated on it. It is important to repay the loan as will help you improve your CIBIL score over time and keep the goodwill of the borrower.
Loan repayment is a great idea. It is advisable to repay your loan in full to prevent your credit scores from slipping, maintain credibility as a borrower, and protect your financial future.
Returning money that you have borrowed from a lender is known as repayment. You must make regular monthly payments for a set period of time in order to repay a loan. These periodic payments contain both principal and interest.
There are different types of loan repayment methods. They are
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