Loan Repayment Strategies: Repay Faster & Save Lakhs

You have borrowed ₹5 lakh. Your EMI amount would be ₹15,880 for 36 months. For a period of 3 years, you would pay a total amount of ₹1,71,880 (₹5L principal + ₹71,880 interest).

What if you manage to save ₹20,000 as interest without raising the EMI value? What if you manage to repay your loan 6 months before its due date?

Here is a way to help you in repaying your loan efficiently.

What is Loan Repayment?

Repayment of a loan means repayment of the borrowed money including interest to the lender in fixed time periods through regular installments.

Few important terms:

• Principal: Amount borrowed initially (₹5 lakh)

• Interest: Cost of borrowed amount (₹71,880 over 3 years)

• EMI: Equated Monthly Installment (₹15,880)

• Tenure: Period of loan (3-60 months in general)

• Total cost: Principal + Interest

What is EMI (Equated Monthly Installment)?

EMI is the fixed monthly installment of both principal and interest.

Here's the EMI calculation for 5L at 12% interest for 3 years:

From above, we notice that early payments consist of mostly interest and late payments consist of mostly principal.

Types of Repayment Methods

1. Regular EMI repayment (Standard)

• Pay fixed ₹15,880 monthly for 36 months

• Total cost: ₹5,71,880

• Easy, straightforward

2. Prepayment method

• Regularly pay ₹15,880 + an additional ₹1,000 whenever possible

• Helps you reduce principal earlier and hence interest

3. Foreclosure of loan repayment

• Prepayment of loan before its schedule

• Eg., prepayment of ₹2L of balance after 24 months

• Helps you save interest that you would otherwise have to pay (remaining 12 months worth of interest)

8 Proven Loan Repayment Strategies

1. Budgeting yourself: Plan your monthly budget Income - fixed expenses - EMI - balance. Your EMI should not be more than 30-40% of your income.

2. Never forget your EMI: Make an auto-debit mandate from your bank to avoid forgetting the due date and avoid any penalties or impact on your CIBIL.

3. Pre-payment using bonuses and refunds: Utilize the annual bonus of ₹50K to pre-pay ₹40K and celebrate with ₹10K. Prepayment of tax refund saves a lot of interest payments.

4. Increase your EMI: If you find it difficult to pay ₹2,000 as prepayment, increase your EMI by ₹500-1,000. Small increments help you save some EMIs.

5. Debt snowball technique: In case you have more loans to pay off, you may pay the minimum EMI for all the loans and keep aside the rest of the money for the loan with a smaller outstanding balance. Pay-off this loan and follow the same procedure for the remaining loans.

6. Refinancing the loan: After 6-12 EMIs, if your CIBIL score improves then refinance the loan from a new lender at a lower interest rate.

7. Loan balance transfer: Balance transferring of loans means consolidating the multiple loans to a single loan account. For example, personal loan+credit card loan into a personal loan.

8. Increase the loan tenure: Increase the loan tenure in case of temporary financial constraint, reduce the EMI and begin pre-payment later on.

Read More: Personal Loan Eligibility: Complete Guide

Cost Savings by Using Different Strategies

Example 1: ₹40K Prepayment Impact

• Loan amount: ₹5L at 12% interest for 3 years

• Regular repayment cost: ₹1,71,880 interest

• ₹40K prepayment after 12 months: saves ₹10,000 of interest

• New total cost: ₹1,61,880

Example 2: Duration Impact

• Loan amount: ₹5L at 12%

• 3 years duration: ₹1,71,880 interest

• 5 years duration: ₹2,95,980 interest

• Difference of interest: ₹1,24,100

Example 3: Additional ₹500 monthly

• Regular EMI: ₹15,880

• Additional ₹500: ₹16,380

• Total additional amount per month: ₹18,000 (36 months)

• Interest saved: ₹24,000+

• Loan will be cleared 3 months early

Loan Repayment Strategy Plan

Month 1: Budgeting done, auto-debit set up Month 6: ₹10K pre-payment using bonus Month 12: Review whether CIBIL improved or not. Consider doing refinancing now Month 24: ₹20K prepayment using savings Month 30: Foreclose the loan 6 months early

How Tenure Affects Your EMI?

The key takeaway is: long tenure leads to lower EMI but more total interest.

When to Prepay & When to Extend the Tenure

Prepay when

• You have excess money (bonuses, refunds, investment profits)

• Your loan interest >14% (high cost borrowing)

• Want to clear your debt quickly

• Able to afford higher EMI

Extend the tenure when

• Facing financial problems (loss of job, emergency cases)

• EMI becomes hard to bear

• But make sure to prepay aggressively later

Most Common Loan Repayment Mistakes

Mistake 1: Missed EMI Payment

• Outcome: Penalty ₹100-₹500, 10-30 points reduction in CIBIL, increased rates on future loans by 2-3%

Mistake 2: Always paying the minimum payment

• Outcome: High interest payment throughout the tenure

Mistake 3: Increasing the tenure unnecessarily

• Outcome: Pay ₹1,24K more interest (3 year vs 5 year)

Mistake 4: Not doing refinancing even though CIBIL has improved

• Outcome: Continue to pay a high interest rate

Mistake 5: Taking multiple loans

• Outcome: Confusion, missed payments, and damage in CIBIL

FAQ - Quick Answers

Question: Is it always beneficial to prepay?
Answer: Yes. Prepayment is always beneficial because it helps reduce the total interest cost. However, do not prepay if you have any emergency situations.

Question: Will it affect your CIBIL if you prepay?
Answer: No. It has a positive impact as it helps improve your CIBIL since on-time regular and prepayments help you boost your score.

Question: Can you change the EMI amount?
Answer: Yes, after 6-12 EMIs. You can either do refinancing with a new lender or change tenure. Changing tenure increases the interest amount.

Question: What if you cannot afford to pay the EMI?
Answer: Contact your lender immediately and ask for an extension/restructuring of tenure.

Question: Should you prepay the loan early?
Answer: Yes, especially if the interest rate >14% or you have surplus money.

What's Next?

Action plan

1. Calculate the EMI - using CreditMitra
2. Set up auto-debit - Do not miss payment
3. Create your budget - Manageable EMI amount
4. Plan for prepayment - When you can pay extra?
5. Monitor CIBIL - After 6 months
6. Execute prepayment - Use your bonus/refund/savings
7. Tracking your savings - Interest amount decreases after every prepayment

Every ₹1,000 prepayment saves around ₹200-₹300 of interest cost.