What is Loan Repayment & How Does It Work

22 April, 2024

Synopsis:

• Loan repayment is the process of returning a loan obtained.
• There are different types of repayment like – fixed rate loan, floating rate loan, balloon loan and interest only loan.
• Managing loan repayment is important to ensure financial stability and avoid defaults.

Loans play a pivotal role in our lives, allowing us to fulfil our various dreams. Obtaining a loan is only half the journey; the other half involves loan repayment. Understanding the basics of loan repayments and what EMI payment is, is essential for anyone who has borrowed money or plans to do so. If you do take a loan, you can easily repay your EMIs through HDFC Bank’s PayZapp app. Here’s all you need to know about loan repayment and how you can repay your EMIs via PayZapp.

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Understanding The Basics Of Loans

The following are the main elements of any type of loan:

· Principal Amount

This is the initial amount that you have borrowed from the lender.

· Interest Rate

Interest rate is expressed as an annual percentage rate (APR). It can vary widely depending on the loan type and the lender.

· Loan Tenure

Loan tenure is the maximum duration in which you can repay the loan. Tenures can range from a few months to several years, based on your chosen loan type.

· Number of Instalments

The number of instalments essentially refer to the EMIs payable (in months). You typically have to pay one instalment each month.

What Is Loan Repayment?

Loan repayment is the process of returning borrowed funds, typically with interest, over a specified period. The loan repayment process is governed by various financial institutions, including banks and non-banking financial companies (NBFCs). Whether you have taken out a Personal Loan, Home Loan, Education Loan, or any other form of credit, loan repayment follows a structured process.

Calculation Of EMI

EMIs are calculated using a standard formula that considers the principal amount, interest rate, and loan tenure. Most banks use the reducing balance method to calculate EMIs. Initially a significant portion of your EMI goes towards paying the interest, as interest is calculated on the outstanding principal balance. As you continue to pay EMIs, the outstanding principal balance decreases. Consequently, a larger portion of your EMI is allocated towards repaying the principal amount. The sum of the interest component and the principal component constitutes your monthly EMI.

Types of Loan Repayment

Here are some common types of loan repayment structures, catering to different financial needs and preferences:

· Fixed-Rate Loan

In fixed-rate loan, the interest rate remains constant throughout the loan tenure. Borrowers benefit from predictable monthly payments, making budgeting easier.

· Floating-Rate Loan

The interest rate in these loans fluctuates based on market conditions. While initial interest rates may be lower, they are subject to change over time, making monthly payments less predictable.

· Balloon Loan

A balloon loan is a type of financing where borrowers make small monthly payments for most of the loan term, with a larger "balloon" payment due at the end.

· Bullet Repayment Loan

In bullet repayment loans, borrowers pay only the interest during the loan tenure and settle the principal amount as a lump sum at the end of the term.

· Amortising Loan

In this type of loan, EMIs consist of both interest and principal components, ensuring that the entire loan amount is repaid by the end of the loan tenure.

· Interest-Only Loan

In interest-only loans, borrowers pay only the interest during the loan tenure. The principal amount remains unchanged, and the borrower must repay it separately.

· Part Payment Of Loan

A part payment in loan allows you to make extra payments towards principal loan amount, reducing the outstanding balance and potentially shortening the loan tenure.

Factors Affecting Loan Repayment

Several factors can influence the loan repayment process in India:

· The loan duration impacts the EMI amount and the total interest paid. Longer tenures result in smaller EMIs but higher overall interest costs.

· The principal amount borrowed directly affects the EMI. Larger loans will have higher EMIs.

· The rate of interest impacts both the EMI and the total interest paid over the loan tenure. Even a small change in the interest rate can have a substantial effect on the overall cost of the loan.

· You have the option to make prepayments or foreclose the loan before the stipulated tenure. While this can reduce interest costs, lenders may charge prepayment penalties.

Dealing With Loan Defaults

If you are wondering what is overdue payment in loan, it occurs when you are unable to pay the loan EMI on time for any given reason. Following are some options to consider in case you have defaulted on a loan payment or anticipate to do so in the future:

· If you anticipate difficulties in repaying your loan, reach out to your lender as soon as possible. Many lenders offer flexibility in terms of restructuring the loan or providing a temporary moratorium.

· Some lenders may allow you to extend the loan tenure or temporarily reduce the EMI amount to ease your financial burden. However, these changes may result in increased overall interest costs.

· Defaulting on your loan can have severe consequences, including legal action and repossession. It is crucial to explore all possible options to prevent such situations.

Loan Repayment Strategies

Effectively managing loan repayment is essential to ensure financial stability and avoiding default. Here are some strategies to consider:

· Use your surplus funds to prepay your loan as this helps reduce the outstanding principal balance, while you save on interest costs.

· Set up an auto-debit arrangement with your bank to ensure timely EMI payments. This eliminates the risk of missing payments and incurring penalties.

· Explore options to refinance your loan if you find a better interest rate after contemplating the new loan terms and additional fees (if applicable).

· Consider loan insurance to protect your family from the burden of loan repayment in case of unforeseen circumstances such as disability or death.

Repay Your Loan EMIs Conveniently Via PayZapp

HDFC Bank’s PayZapp app allows you to repay your loan EMIs at the click of a few buttons. You can also set up standing instructions to have the EMI amount debited from your linked bank account or Debit/Credit Card on a fixed date. You merely need to add your lender as the payee, set the EMI amount and payment date, and voila, your EMIs will be paid. This way, you need not remember the payment date. With just a few taps on the user-friendly PayZapp mobile app, you can settle your debts, schedule automatic payments, and track your loan repayment status.

*Disclaimer: Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.