Today, a loan can be taken to meet almost all the necessities whether it is to buy a new house, a new car, or to support higher education. According to the Reserve Bank Of India (RBI), Indians took loans for houses and cars through the pandemic in 2020-21, and what was more, the rate of personal loans taken grew at an average of about 12% during the second wave.
Any loan amount needs to be returned along with the interest through repayment methods like equated monthly instalments (EMI) or bullet payments. Defaulting on your EMI even once may lead to late fee charges, punitive interest, or seizure of assets in case of a collateral loan. Moreover, it reflects badly on your credit score. This is why it is imperative to understand the details of loan repayment and how does it work.
What Is Loan Repayment?
The act of paying the borrowed money back to the lender along with the interest in the stipulated time is called loan repayment. For example, when you apply for a personal loan of say Rs. 10 lakhs through a bank or an instant online credit app like MoneyTap, you have to repay the loan amount along with the applied rate of interest within 1 to 5 years of tenure.
How Does Loan Repayment Work?
Loan repayment generally occurs through EMIs where the loan amount is repaid in pre-fixed instalments on a scheduled date until the tenure ends and the debt is paid off completely.
Typically, the EMI comprises a higher percentage of interest in the initial part of the tenure. Gradually, the interest component reduces and the principal component increases. EMI calculators can be used to get an approximate amount you would need to repay every month based on your loan type, amount, tenure, and interest rate.
Why Is Loan Repayment Important?
If you don’t want to get stuck with unnecessary charges and debt traps, you need to ensure that there is no delay or default in paying the EMI.
- Saving Yourself from Penalties
You want to steer clear of landing in a deadly financial situation. Whether it is a home loan or a personal loan repayment, EMIs need to be paid on the scheduled date every month to avoid paying a penalty fee or going bankrupt.
- Maintaining A Healthy Credit Score
Having a good credit score means you are creditworthy and lenders will approve your loan application quickly. You build a healthy credit history by repaying your loan EMIs on time and maintaining a low credit utilization rate. Upholding a healthy credit report (usually compiled by CIBIL in India) makes borrowing a large sum of money easier in the future as the perceived risk of recovering the money back from you becomes lesser.
- Getting Loans Is Easier
If your loan repayment is done in time, your future loan applications can get approved quickly, you can avail of a larger loan amount and a lower interest rate, thereby making your financial journey easier.
How Does Loan Repayment Impact Your Credit History?
Your credit history comprises all your borrowing and repayment history. As mentioned above, the higher the number of defaults, the more likely you are to degrade your credit score. A bad credit history signifies that you have inefficient debt management skills. Moreover, mounting up further debts does not only lead you to debt traps but also drags your credit score further down. Hence, it is advised to not borrow multiple loans at the same time.
Now that you know the details of what is loan repayment and how loan repayment works, you can make an informed decision by budgeting your money in a way that you can repay any loan amount without taking stress.
Raj Kumar is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance clap.