Skip to main content

Loan Prepayment

 

loan prepayment

Below are some factors which one should consider and work in reducing the debt exposure.

1. Type of loan:

Depending on the productivity a loan brings in your personal finance, these are categorized into 2 parts – Good loans and bad loans.

Any loan taken just to spend on personal consumption is called as bad loan. These loans generally come under unsecured category i.e. you don't need to show any collateral and also will not require a guarantor. These loans are purely disbursed based on your earning potential and repayment capacity like personal loans, credit card loans.

Good loans results in creation of some productive assets like home, intellectual capital etc. Home loans and education loans comes under this category.

There are some "not so good loans", which are taken against collateral with a specific purpose like for business expansion or personal emergency for e.g. Loan against property or gold loans.

The last category is of "Not so bad loans", which though results in creation of assets but those assets are unproductive and depreciable like Vehicle loan, Consumer durables loan etc.

While deciding on which loan to close first, the first factor you have to look at is the loan type and its impact on overall personal finance. Do note that where bad loans does not result in creation of any asset, it also is looked down upon by credit scoring agencies, so you have to start with Bad loans first. One needs to stay off bad loans as much as possible.

2. Interest rates and Tenure of Loan

People tend to prepay those loans which are near completion or paying high EMIs on. They ignore the interest outgo part. Interest portion of the EMI is the cost of the loan which you are paying. So, you need to have an understanding of what savings you'll generate out of pre paying the loan.

Interest rates on bad loans as discussed above, range as high as 16%-36%. So, technically, it makes sense to close these loans first. But tenure of loan also plays a major role in decision making towards pre closure of loan.

It is true that higher the rate of interest, higher the outflow as the interest payout would be higher for the same level of loan. So sometimes it doesn't make sense to repay the loan in the later years of its tenure. Let's understand this with an example of Rahul.

Out of his multiple loans, two loans- personal loan and car loan were taken simultaneously, as detailed below

Personal Loan (5 lakh) – Tenure 5 years, Interest rate 14%, EMI = Rs 11634/-.

Car Loan (7 lakh) – Tenure 7 years, Interest rate 10%, EMI = Rs 11621/-

Year

Interest Out go (PL)

Interest outgo (CL)

1

65355

66727

2

54265

59111

3

41520

50699

4

26871

41405

5

10034

31138

6

19796

7

7266

The above calculation clearly shows that if one has to close any among both, one should work on car loan first, as it will result in more interest saving.

3. EMI outgo :

EMI impacts your cash flow. High EMIs mean lower surpluses left for other savings. Loans are not only a financial burden but a psychological one too. Doing away with high EMI loans usually generates confidence in one's finances. Thus, if your high EMIs are keeping you awake at night, it is better to close those loans first. Living a stress free life is priceless.

4. Tax benefits:

There are some loan options which come with tax benefits too. Needless to say those come under good loans category. You get tax benefit u/s 80C and U/s 24 in case of home loan repayment, and in case of education loan you enjoy tax benefit u/s 80E as deduction of interest payment from tax payable income.

These tax benefits indirectly reduces the overall impact on cash outflow .So if you have such loans in your portfolio, do consider these tax benefits too, before taking a decision on which loan to prepay first.

Both Rahul and Sunita were very happy that now they have a direction and handholding on how things are to be sorted out. Rahul promised not to indulge in any kind of debt in future and Sunita took responsibility for budgeting and sticking to it, so they may come out of this trap at the earliest.

Many times one cannot escape taking loans, especially with the housing becoming unaffordable and with rising education costs. But taking loans on unnecessary consumer durables or for personal consumption worsens the personal finances. Your loan taking decision should not only depend on your present desires but also your future goals. To make your present perfect, you should not make your future tense.

Service your loan EMIs on time, don't take loans for consumption or your desires, take good loans if at all required. Your loan portfolio should not compromise your future!

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

Leave a missed Call on 94 8300 8300

Leave your comment with mail ID and we will answer them

OR

You can write back to us at

PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any Fund Application Forms

---------------------------------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Franklin India Bluechip
      4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds Invest Online

      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
      4. Birla Sun Life Front Line Equity Fund
      5. Franklin India Prima

C. Mid and SmallCap Funds Invest Online

      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
      5. Birla Sun Life Dividend Yield Plus
      6. SBI Emerging Businesses Fund
      7. HDFC Mid-Cap Opportunities Fund
      8. ICICI Prudential Discovery Fund

D. Small and MicroCap Funds Invest Online

      1. DSP BlackRock MicroCap Fund
      2. Franklin India Smaller Companies

E. Sector Funds Invest Online

      1. Reliance Banking Fund
      2. Reliance Banking Fund
      3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

      1. DSP BlackRock Tax Saver Fund
      2. Reliance Tax Saver (ELSS) Fund

G. Gold Mutual Funds Invest Online

      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund
      4. Birla Sun Life Gold

H. International funds Invest Online

1. Birla Sun Life International Equity Plan A

2. DSP BlackRock US Flexible Equity

3. FT India Feeder Franklin US Opportunities

4. ICICI Prudential US Bluechip Equity

5. Motilal Oswal MOSt Shares NASDAQ-100 ETF

Popular posts from this blog

ICICI Pru Mutual Fund Dividend

ICICI Prudential Mutual Fund has announced dividend under the following schemes: Scheme Dividend ( Rs /unit) ICICI Pru Capital Protection Oriented Ser V Plan B-D 0.03611325 ICICI Pru Capital Protection Oriented Ser V Plan B Direct-D 0.03611325 ICICI Pru Balanced Advantage Direct-DM 0.06 The record date has been fixed as February 08, 2017. ------------------------------ ------ Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 4 Tax Saver Mutual Funds for 2017 - 2018 Best 4 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. BNP Paribas Long Term Equity Fund Invest in Best Performing 2017 Tax Saver Mutual Funds Online Invest Best Tax Saver Mutual Funds Online Download Top Tax Saver Mutual Funds  Application Forms For further information contact  SaveTaxGetRich on 94 8300 8300 ------------------------------ ------ Leave y...
Read more

What is Financial Freedom?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)     There were many things common between our Freedom fighters. All had the Single vision (Free India), common goal (independence) and had a disciplined and focused approach. They were ready to do anything and everything and had made so many sacrifices to see India free . But the road to freedom was not easy .They had faced lot many hardships, went to jail so many times and even confronted physical and mental torture from the British. There was one more thing which proved to be an advantage to our fighters that most of them were professional lawyers. The knowledge of legal issues and its impact on our country at large has helped them counter various bills and proposed new laws by the then government. It is due to their continuous effort that we are able to achieve the goal of Independent Indi...
Read more

Hidden Bank Fees

  What Banks Hide From Customers Imagine after a peaceful and exciting holiday you receive your bank statement with steep charges. You then rush to your bank and start confronting staff members and to your dismay, you come to know that the high end debit card was charged very heavily. Wouldn't this cause damage to your finances? So remember, the world outside is full of deceptive and double cheating people. Unethical practices are always used by company sales person in order to meet the target. Credit card companies, mutual funds and bank institutions always play dirty tricks to lure customers and the practices are rampant. So here's how you should be careful while dealing with your banks: High End Debit Card Charges While opening an account with a bank you opt for a debit card with minimal charges. But later on when you upgrade your card and opt for high end debit card the annual charge rise by a good amount. Though such a card has slew of features but it all comes at a high ...
Read more

Partial withdrawal from PPF

  Public Provident Fund (PPF) account has a lock in period   If you opened a PPF account to meet your retirement needs,, think twice about withdrawing from this fund before retirement. But provided it's an emergency here are the rules. Public Provident Fund (PPF) account has a lock in period before which you cannot withdraw your money.   The partial withdrawal is allowed after the completion of 6 financial years . This means that you will be allowed a partial withdrawal from 1 April 2017. The maximum partial withdrawal allowed is the least of the following: 50 percent of the account balance at the end of fourth financial year, 31 March 15 50 percent of the account balance of the end of previous financial year, 31 March 17.   There's a loan option available on your PPF account between the fourth and the sixth financial year. You can obtain a loan of up to 25 per cent of the balance in your account. However, this will attract interest of 2 percent more than the prevailing ...
Read more

Updating a minor PAN card upon becoming adults

  Updating a minor's PAN card once they become adults A PAN card issued in the name of a minor does not contain the minor's photograph or signature, and therefore, cannot be used as a valid proof of identity. Once a minor PAN card holder turns 18, the relevant changes must be made in the PAN records. A new card is then issued bearing a photograph and signature. Application The applicant is required to fill up the "Request for new PAN card andor changes or correction in PAN data" form. The form can be filled up online by accessing NSDL's Tax Information Network website and clicking on the online PAN application tab. Information The applicant must mention the existing PAN number in the application and check the `photo mismatch' and `signature mismatch' boxes, and submit the online form. The form must also be printed out, signed by the applicant, and submitted along with two photographs. Documents Identity and address proof in the form of a copy of the app...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now