What is Loan Repayment and Why is this Important

 Applying for a loan is easy but what makes it stressful is the repayment of loan loaded with interest. There are borrowers who smartly manage their loans and repay as pledged but there are also defaulters who abscond when it comes to loan repayment.

Loan repayment is a critical step that borrowers should not ignore when the EMI date arrives. Acquire loans only if repayment is possible, otherwise defaulters spoil their own credit history and financial background that causes hurdles in acquiring future loans.

What is Loan Repayment?

Loan repayment is the act of paying off the borrowed money to the lender through periodic tenure, which involves both principal and interest amount through equated monthly instalment.  Loan repayment is a very essential aspect for a good credit score. Depending on the lender’s terms and conditions an early loan repayment may sometimes lead to penalty charges. The penalty may be based on a percentage of your outstanding balance. Therefore, making timely loan repayment is an important factor for evading extra charges or fees.
Read also: Understanding Loan Repayment in Herofincorp

How Loan Repayment Works?

Loan repayment involves fulfilling debt obligations to the lender over the agreed tenure. Regarding Personal Loans, repayment follows the Equated Monthly Instalments (EMI) method. Each EMI consists of the principal amount and the interest payable. 

For example, let's say you take out a Personal Loan of Rs 100,000 at an annual interest rate of 12%, with a tenure of 12 months. Then, your monthly EMI will be calculated as follows:

• Principal Amount: Rs 100,000 / 12 = Rs 8,333.33
• Interest Payable (First Month): (12% / 12) x Rs 100,000 = Rs 1,000

So, in the first month, you would pay a total EMI of Rs 9,333.33, with Rs 8,333.33 going towards reducing the principal amount and Rs 1,000 as interest.

As you continue making regular payments, a more significant portion goes towards repaying the principal, reducing your outstanding balance over time.

Methods of Loan Repayment

Debt Consolidation: If you're grappling with multiple debts, consider debt consolidation. It involves combining various debts into a single loan, making repayments more manageable and lowering your overall interest rate.

Provident Fund: Depending on your financial situation, you can tap into your investments to repay loans. Borrowing against your life insurance policy or using your provident fund can help settle outstanding debts.

Credit Card: When extravagant credit card spending leads to mounting bills, it's wise to request your credit card company to convert the dues into EMIs. It eases the burden of repayment.

Also, making minor adjustments to your lifestyle can go a long way in improving your financial health. Trim excessive monthly expenses, and you'll find that saving for loan repayments becomes more feasible.

Why is Loan Repayment Important?

Loan repayment should be taken seriously because it not only reduces your loan obligation and interest accrued, but loans also reflect your credit history.  Timely loan repayments will influence the lender and increase trust towards you. The loan will be approved immediately as your credit history will have an impressive impact on the lender.

A positive credit history indicates the ability to handle finances and credit issues with great ease. Failure to maintain your debts and loans reflects a bad credit score through the credit report, creating difficulties in future loan approvals. Therefore, always keep a check on loan repayment to be cleared on time to prevent charges and penalties.
Read also: Why would a personal loan with a longer repayment term be a good choice?

Conclusion 

Understanding the importance of loan repayment is integral to personal financial stability, fostering a positive financial reputation and opening doors to favourable borrowing opportunities in the future. This financial responsibility is of paramount importance. It ensures borrowers honour their commitments, maintain good credit, and build trust with lenders. 

Ultimately, understanding the significance of loan repayment empowers individuals to manage their finances wisely and secure their well-being.

Frequently Asked Questions

1. What are the methods of repaying a loan?

Methods of repaying a loan vary but generally include EMIs, lump-sum payments, and automatic deductions from your bank account. Choose the one that suits your financial situation and preferences.

2. Is there any option by which I can repay the loan early?

Yes, you can repay a loan early through partial prepayment or foreclosure. Check your loan agreement for terms and conditions, including prepayment penalties or charges.

3. What will happen if I do not repay my loan on time?

If you don't repay your loan on time, it can lead to penalties, higher interest costs, and a negative impact on your credit score.