Monday, 7 January 2013

Prepayment of Loans: Is it wise decision?

Nowadays loan has become very necessary to purchase a car, purchase a home, for higher education and many several purposes. In fact if we look the whole picture, almost all the companies, businesses and individuals takes loan for several purposes. Because we believe in invest the capital to earn money and acquire things on loan by this mean our both purposes has been solved, as we will have cash as well as our need will fulfill. Nobody wants to take risk to engage surplus fund for acquiring things and blank oneself.

Now the thing is that when we go for a loan is it wise to prepay loan and why we should prepay the loan.

Prepayment of loans is the payment of the due balance amount or the part of the due balance amount on that date before the tenure completion for saving interest and reduction of financial liability.

Prepayment is of two types:

1) Partial Prepayment
2) Full Prepayment

In the Partial Prepayment some part of due amount has been paid to save interest of that period.

In complete Prepayment full due amount has been paid to save interest and reduce liability.

If we take a loan of Rs. 1,00,000 on interest rate 10 % for 3 year. Suppose that EMI will be Rs.3227/ month. Now if we pay a whole due amount after 2 months it will be called Full Prepayment and if we pay a part of due amount it will be called Partial Prepayment.

Suppose that after paying 12 months EMI’s of Rs.3227 the amount due is Rs. 69926 for 2 years. Now if one pay (69926-36702=33224) Rs 33224 for second year, he/she can save the interest on this amount i.e. Rs.5, 497 and he/she have to pay amount due on the completion of second year.

Principle +Interest

After partial prepayment one has two options. First is he can pay according to 3rd year schedule and can pay the loan before loan tenure and the second option is he/she can also reduce the amount of monthly EMI for the same tenure.

The prepayment is good or bad this depends on the following factors:

1) The interest rate is fixed or fluctuates: If one has taken a loan with a fixed interest rate then it is certain that he has to pay according to a certain rate so the other fluctuating factor is time period only. So you can save interest only by prepaying but if the interest rate is fluctuate type then it’s hard to decide that prepayment is beneficial or not.

2) The interest rate of other investment instruments:  Suppose you are prepaying  on the 9 % interest rate and some other investment instrument is giving you 11% interest rate for the same time in this condition if you are prepaying a loan to save interest rate 9% actually you are getting under the value of your asset. For this before prepaying one should look at other investment option.

3) Psychological factors: Along with above factor we cannot ignore one’s psyche. This is a very important factor. Some people who have not very strong background on have not fix source of income wants to complete loan as soon as possible for feeling secure after all loan is a big financial liability. In this case one doesn’t see the small margin and want to pay loan ASAP.
After all this you have to decide that prepayment for you is a wise decision or not because everyone’s has its own conditions in which they have to survive.

Good Luck...

Friday, 28 December 2012


Nowadays when the rate of real estate properties is continuously increasing day by day and when having a home is becoming a dream for every salaried person, home loans have performed a very vital part in completing one's dream of having a home. Every such man who is salaried or having a fixed income cannot think about buying a home by savings only. In that condition borrowing a home loan is a very good option because it not just brings you a home but it also directs you towards completion of loan liability in the form of EMI (Equal Monthly Installments) which will also develop the habit of saving a part of your income.

What is exactly a Home Loan?

Home Loan simply means borrowing money from any bank or financial company at an interest rate to purchase a home. But nowadays home loans are not only limited to purchasing a home. Now the competition has increased in Banking and financial industry. To beat the competition this sector has broadened the term “Home Loan”. Now every bank has several specified options to cater the varying needs of their customer.

According to customer's different needs, banks offer following types of home loans :

1) Loan for Purchasing a Home
2) Loan for Home Repairing
3) Loan for Home construction
4) Loan for additional construction
5) Loan for purchasing land
6) Loan for Home furnishing and consumer durables

Beyond this, some bank also offers additional benefits if you are taking bank loan from them . These are:

1) Customer Privileges: If you are an existing home loan customer you can avail other loans such as Car loan, Two Wheeler Loan, Personal Loan at very low interest rates.

2) Term assurance plans: Insurance Company also provides term assurance plan, in which your loan term period is covered under a plan which is a guarantee of your loan payment in an assured period in case of any mishappening with insured.

Home Loan Interest Rate: Banks and financial company charge interest over the loan amount. Interest rates are different for different types of loans. The rate of different types of loans such as a car loan, education loan, home loan, personal loan basically depends on the amount of loan. Also different banks charge different interest rates for same type of loan, although the difference would not be too much. Due to increasing competition in the banking sector, customers get the benefit in the form customer support, value to customer, financial transparency, good treatment and some other privileges benefits.

Banks fixed their interest rates which is not less than their base rate. Now if we are talking about base rate then it is the interest rate decided by a bank that the bank cannot lend loans below this interest rate. Banks fix base rate by choosing benchmark but at the same time it has to be transparent.

Every bank has its own base rate in which banks add administrative cost and margin to fix interest rates for tenure of time.

Banks have two ways to charge interest one is Fixed Interest rate and other is Floating Interest loans.

Fixed Interest Rate: Fixed interest rates are fixed over the tenure and are not affected by changing policies.

Floating Interest Rate: Floating Interest rates are that interest rates which floats according to changing policies.

Banks fixed interest rates are oftenly higher than floating interest rates.

Here are the some major bank interest rates:

SBI Home Loan

Loan Amount
Interest Rate

Base Rate : 9.75%
Upto Rs. 30 lacs
10.00% pa
Above Rs. 30 lacs
10.15% pa

ICICI Home Loan

Loan Amount
Scheme I
Scheme II
Scheme III
Upto Rs. 30 lacs
10.25% (Fixed 1 yr)
10.25% (Fixed 2yrs)

10.50% (Fixed 3yrs)
then 10.25%
From Rs. 30 lacs to 75 lacs
10.50% (Fixed 1 yr)

10.50% (Fixed 2yrs)

10.75% (Fixed 3yrs)
then 10.50%
Above 75 lacs
10.50% (Fixed 1 yr)

10.50% (Fixed 2yrs)

10.75% (Fixed 3yrs)
then 10.50%

HDFC Home Loan

Loan Amount
Scheme I
Scheme II
Upto and including Rs. 30 lacs
10.75% (Upto 10Lacs) (Fixed for 10yrs), then 11%
Above Rs. 30 lacs to 75 lacs
11% (Upto 10Lacs) (Fixed for 10yrs), then 11.25%
Above 75 lacs
11% (Upto 10Lacs) (Fixed for 10yrs), then 11.25%

This data has been provided only for informational and advisory purpose.

Good Luck...