Whether it is a housing loan, personal loan, or any other loan, it is a liability for the borrower. The borrower has to repay the loan amount with interest over specific repayment tenure, decided in advance. The amount that the borrower repays every month is also known as the EMI or Equated Monthly Instalment. Repaying the EMI regularly on time will result in the liquidation of the loan amount at the end of the tenure. However, borrowers have the option of making prepayments or advance payments. The primary objective behind these prepayments is to save on the interest component. Let us examine the concept of prepayment in detail and understand the amount of interest you save by using the Prepayment Calculator.
Before we go into the aspects of the Prepayment Calculator and learn how to use it, it is essential to comprehend the concept of the EMI.
EMI stands for Equated Monthly Instalment. It constitutes the amount that a borrower has to repay every month for specific loan tenure. EMI depends on the following three factors:
The calculation of the EMI is a complex process. However, EMI Calculator is available on the internet. These calculators are also available on the official websites of the individual banks and financial institutions. One such calculator is also available on our site.
Using the EMI Calculator is easy. The user has to enter the following three pieces of information:
On entering this data, you get your EMI in an instant.
This EMI comprises of two constituents, the principal repayment component, and the interest repayment portion. Both of these amounts are variable. Usually, the interest portion is higher in the initial stages. It reduces gradually, as the loan gets repaid. Over the entire tenure, the principal amount gets nullified.
The borrower has a fixed liability of repaying the EMI every month for the entire tenure. At times, the borrower could receive a lump sum amount that they can use for making a prepayment to the loan account. This prepayment is nothing but an advance payment of the loan. The objective behind the prepayment is to reduce the interest burden on the loan. Banks usually allow such prepayments by the borrower. As this amount goes towards liquidating the principal component of the loan, the borrower benefits by a substantial reduction in the interest portion of the loan.
From the concept explained above, you can gather that any amount paid by the borrower over and above the regular EMI is a prepayment. This prepayment can be either a partial prepayment or a complete prepayment. In the case of the latter option, it is also known as the foreclosure of the loan.
Partial prepayments can be of different types, regular prepayment or lump sum prepayment. Regular or periodic prepayment is when the borrower keeps paying excess amounts over the stipulated EMI at regular intervals. This interval can be monthly, quarterly, half-yearly, or annual. Any other type of prepayment is a lump sum prepayment.
Prepaying any loan has its merits. The following benefits accrue to the borrower when they make prepayments:
We have seen that the manual calculation of the regular EMI itself is a complicated task. Hence, we use the EMI Calculator to do so. Similarly, calculating the effect of a periodic prepayment in a loan account is also a complicated calculating procedure. However, loan Prepayment Calculators make this task easy for us.
The loan Prepayment Calculator helps borrowers in many ways:
Similar to the EMI Calculator, the loan Prepayment Calculator requires specific data. We shall compute the working of a loan Prepayment Calculator using a few concrete examples.
We shall choose the home loan for our example because of the following reasons:
Scenario 1 - Full prepayment (Foreclosure)
Enter the above data on the loan Prepayment Calculator to calculate the foreclosure amount.
This amount is also known as the foreclosure amount. It is also equal to the balance outstanding in the loan account at the end of three years. As you repay the entire amount, you save on the whole of future interest payable on the home loan.
Scenario 2 - Partial prepayment in a lump sum (one-time)
Using the loan Prepayment Calculator, you can find out the amount of interest saved by the borrower. The loan tenure gets reduced substantially.
Under these circumstances, the borrower ends up saving an overall sum of Rs. 6,05,872. The loan tenure reduces by 56 months.
Scenario 3 - Partial prepayment every month (fixed amount)
The loan Prepayment Calculator helps in calculating the benefit under such a scenario as well. On submitting this elementary information, the customer can derive the overall benefit. The loan Prepayment Calculator provides a detailed amortisation chart to make it easy for the customer to understand.
The benefit to the borrower is Rs. 3,37,392 with the overall repayment tenure getting reduced by 43 months.
We have seen three different scenarios where the loan Prepayment Calculator helps us to determine the benefits that accrue to the borrower.
The loan Prepayment Calculator is available on the official websites of many banks and financing companies. MyMoneyMantra.com has one such calculator that can help customers to determine their prepayment amount at a glance.
It depends on the types of loans you have in your portfolio. Prepaying a home loan is beneficial because you end up saving considerable interest over the entire tenure of the home loan. It is also advisable to prepay personal loans because these loans come at a high cost. With investments in the market not fetching attractive returns today, it makes sense to prepay loans and get rid of the liabilities.
As the name suggests, the full prepayment results in the foreclosure of the loan. You get rid of the entire liability. In the case of a part prepayment, you reduce your existing commitment to the extent of the prepayment amount. The interest saving is an additional benefit.
Yes, the loan Prepayment Calculator comes with an option where you can enter information concerning the penal rate of interest. If there is no penalty stipulation, the system allows you to leave the column blank. It is the most accurate tool to calculate the loan prepayment amount and benefits that accrue because of the prepayment.
Usually, the nationalised banks do not place any restrictions on the prepayment of home loans. Private banks and housing finance companies have their internal policies. There could be restrictions on the amount of prepayment, the frequency of prepayment, and so on. As far as personal loans and other loans are concerned, there could be lock-in periods where the borrower cannot make any prepayment.
The ideal timing for prepayment of any loan is in the initial stages of the loan. The home loan has an extended tenure. Hence, it is one of the best loans to make a prepayment. In the case of other loans, you should calculate the benefits that accrue from prepaying the loan amount using the loan Prepayment Calculator. If it is beneficial, you can proceed with the prepayment.
As explained before, the EMI comprises of the interest repayment and principal repayment portions. Hence, any payment above the regular EMI will go on to reduce the principal amount. The EMI is directly proportional to the principal outstanding amount and the rate of interest. It is also inversely proportional to the tenure. Thus, if you do not reduce the EMI, the mandate will automatically reduce.
It depends on the situation. If you have a high degree of financial stability, you can maintain the EMI as constant and reduce the tenure. You could end up closing the loan quicker. However, under specific circumstances, you might have to reduce the EMI.
Circumstances can arise when you might have a reduced income after an event such as retirement. Under such circumstances, it is a better idea to use a portion of the retirement benefits and make a substantial prepayment. You can then request the bank to reduce your EMI and maintain the residual tenure as constant. It will help you cope with the EMI burden better.
Making a lumpsum prepayment is always beneficial because you tend to save a significant portion of interest. However, if you have the required income to make regular monthly prepayments, it is an excellent habit. You could end up saving a useful amount by reducing the residual tenure considerably.
The manual calculation could be a tedious one. Customers can use MS Excel tables to arrive at the amounts. However, the best option is to use the readymade loan Prepayment Calculator. With the minimum of effort, you get the best and most accurate results.