Loan Repayment is the act of returning money borrowed from a lender. The loan is repaid in a series of scheduled payments called EMIs, which include both principal and interest. The original amount borrowed in a loan is referred to as the principal. The charge for the privilege of borrowing money interests; a borrower must pay interest to use the funds released to them through the loan.
Loans can typically be paid off in full at any time, though some contracts may charge an early repayment fee. Consider using an interest rate calculator to learn how to calculate the interest rate in simple steps. The loan agreement contains the repayment terms as well as the agreed-upon interest rate.
When people take out loans, the lender hopes that they will be able to pay them back eventually. Borrowers who fail to do so must pay additional fees on top of the outstanding balance.
Let us now understand how loan repayment works.
How Personal Loan Repayment Works
The Personal Loan repayment is usually done in equal monthly installments (EMIs). The amount of money repaid to the lender each month is known as the installments. It consists of two parts: the principal amount and interest on the principal amount, both of which are paid to the bank or lender every month until the total amount due is paid off over the loan term.
You might think that the principal and interest components of an EMI are split evenly. That is not the case, however. The interest component of an EMI is higher during the initial loan period. The interest component of the loan decreases as the loan term progresses, while the principal component increases.
Importance of Loan repayment
Loan repayment should be taken seriously because it not only lowers your loan liability and interest but also affects your credit score. The immediate financial consequences could range from increased interest (due to missed installment payments) to bankruptcy (in the event of failing to repay altogether). There is also a long-term effect on your credit health, as evidenced by your credit history.
Types of Loan Repayment Methods
Some loan payment methods are listed below; however, the loan repayment option available to you may vary depending on your lender and the type of loan issued:
1. EMIs –The most common Personal Loan repayment option is Equated Monthly Installments EMIs. Every installment includes a portion of the principal and a portion of the interest and is paid monthly over a set period.
However, after a certain number of installments, some banks allow their borrowers to repay the loan. If you want to pay off your loan early, some banks may charge a fee. Prepayment is possible in two ways:
2. Partially or completely Pre-payment: When you pay off a portion of your loan early, you reduce the principal. Because the interest is calculated to the new reduced principal, this saves money on interest.
3. Pre-Closure or Full Pre-Payment: This is when you completely pay off your loan before the tenor.
4. Bullet Repayment – You may be able to repay your loan using the bullet loan repayment method with some loan products. You only have to pay the interest component each month if you choose this option. When the loan term is up, you must make a single bullet payment that covers the entire principal balance.
How can loan repayment improve your credit health?
You now understand how missed payments can negatively impact your credit score. On the other hand, timely payments allow you to establish a positive credit history and improve your credit health.
Loan repayment, when taken lightly, can cause unnecessary complications in the future. If you want to start building a good credit history or improve your credit score, make all of your future payments on time.
To summarise, a loan repayment consists of two components: interest and principal. Borrowers must take loan repayment seriously because it helps to reduce their loan liability as well as the total interest owed. Your loan repayment history is also recorded in your credit report. Borrowers may face immediate financial consequences as a result of missed loan repayments, such as a higher interest component. When it comes to the long-term effects on one’s credit health, loan repayment is crucial. You can get a loan of up to Rs. 25 lakh at the lowest personal loan rates from a reputable lender.
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