Under the credit extending and recovery framework of organized lending institutions, any individual who has availed a conventional loan or any other type of advance needs to make repayments. Such repayment is based on specific criteria determined by lending institutions, which have also been standardized over time. One can opt from various loan repayment methods available with various financial institutions to complete this requirement.
An extensive understanding of the loan repayment mechanism and methods involved can be crucial to managing the advance over the approved tenor. It is only pertinent to understand its impact on unsecured advances such as personal loans as these involve higher risk for the lender and have a significant impact on one’s creditworthiness.
Here’s a detailed explanation of what a loan repayment comprises, along with the methods involved as per the agreed schedule.
Repayment of loans – Meaning and mechanism
Repayment of advances such as small personal loans entails paying back the availed funding to the lender along with all applicable charges. Such charges primarily include interest rates, any other recurring charges (if applicable), and other one-time fees, as and when levied.
For instance, if you have availed a personal loan online or offline, you need to repay the total loan liability that would include the personal loan interest and charges, if any, along with the principal availed.
Such repayment of advances is made as per a few primary concepts, which include –
- Total loan liability
- EMIs payable
- Repayment schedule determined
While the total loan liability has been mentioned above, understanding the following two is essential as it can help you plan your finances better.
EMIs or equated monthly installments are repayment amounts that need to be paid every month until a tenor’s end or repayment completion, whichever is earlier. Such repayment is mandatory and starts right from the next month of loan disbursal or the first due date agreed upon by the lender and borrower.
These installments comprise the loan principal and the interest accrued for the whole tenor, divided as per the lender’s amortisation schedule, which determines the amount of principal and interest component in each EMI. Accordingly, you would need to make EMI payments on or before every due date.
- Repayment schedule
The repayment schedule is a pre-determined timetable that is fixed for complete repayments as per the loan repayment methods selected. It is typically based on the tenor agreed upon between the lender and borrower during loan sanctioning and approval and can be affected by various factors like the borrower’s repayment capacity, debt-to-income ratio, etc.
It is ideal to assess the EMIs payable and the repayment schedule you would need to follow even before applying for your loan. You can take the help of dedicated financial tools such as a personal loan EMI calculator to make this assessment.
Herein, you would need to enter only a few essential details to estimate the EMIs payable, which include the loan principal, the tenor in months, and the interest rate applicable for the selected lender. To adjust the EMIs as per your financial capacity, you need to make changes to the values entered, essentially the loan amount and tenor sought.
Note that changes to the loan tenor would mean inverse changes to the EMI value. However, it directly increases or decreases the total interest payable. In case of changes to the loan principal, it would directly impact the EMI amount. You must thus understand such instances before you use the personal loan calculator.
Financial institutions like Bajaj Finserv provide these EMI calculators for free. Usage of such calculators would also enable you to look at the amortisation schedule that a lender would follow plus the total loan liability during the tenor. Such computation improves your borrowing decision as well.
Such lenders also quicken and simplify the loan availing process through their pre-approved offers. These offers are available on several financial products, including business loans, personal loans for salaried employees, and credit cards. You can check your pre-approved offer only with your essential contact details.
Methods of repayment
Following are some of the common loan repayment methods you can adopt to settle your loan liability with the lending institution.
- Repayment in EMIs
The repayment of loans through EMIs follows a pre-determined schedule. This method allows you to plan your repayments in advance and allocate finances accordingly for timely payments as per the due date. Note that the interest component is included at a higher percentage than the principal component under the EMI payment method for each installment payable. Knowing this can help you manage your personal loan EMI repayment efficiently.
Individuals who have access to lump-sum funding can also opt for prepayment options, allowing faster repayments and reducing your total interest payable. Under prepayments, you can opt for either of the following ways at low to no charges.
- Part-prepayment: This loan repayment method allows you to repay a part of the total loan liability in a lump sum at any time before the tenor ends.
- Foreclosure: This method enables loan account closure along with total loan repayment at a go.
- Bullet payments
Under this repayment method, a borrower needs to pay the interest accruing every month while the principal amount is repaid in a lump sum through bullet payment. This repayment method is, however, not available with all lending institutions.
You can select from these above-mentioned available loan repayment methods as per your liking to ensure timely settlement of your credit liability. It is ideal that you negotiate with your lender for the most suitable tenor and interest rate that should help make repayments affordable as per your financial standing.