Managing your home loan in the best possible manner can help you save a significant amount of money in terms of interest and reduce the overall tenure. Every borrower looks to make a partial or full prepayment on a yearly basis or as a lump sum to get rid of their monthly EMI troubles and free up funds.
By understanding how each of these methods works, you can strategise and make wiser financial decisions in the long run, to have more money at your disposal and be completely free of any debts at a faster rate. The best way to handle extra money, in this case, would be to pay off some or all of your outstanding amount before the due date, without putting your financial stability at risk.
What are the major differences between partial and full prepayments?
It is essential to understand the difference between the two prepayment options to know which one is better for you, in case you have the extra money to make additional payments.
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Partial Prepayment:
With this method, you can make a partial prepayment on a regular basis and keep your account active. You can either reduce your monthly payment amount or shorten the tenure of your loan.
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Full Prepayment:
On the contrary, the full prepayment option lets you pay off the total outstanding amount and close your account. It also releases the documents of the property you put on hold while availing the loan.
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Interest Savings:
Whereas both the options will help you reduce the total interest amount, the first one will only decrease it considerably, while the latter will wipe it off completely.
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Extra Funds:
If you go with the partial option, you will have extra funds lying with you in case of an emergency, while the full prepayment will leave you financially low.
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Penalties:
However, most of the floating rate home loans in India do not levy any prepayment charges on either of the two modes.
Why yearly prepayments are better than lump sum ones and vice versa?
The decision to make partial or full prepayments, either yearly or as a lump sum, depends on the amount of money you have extra each year to make additional payments.
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Annual Additional Payments:
You can go with the option of yearly prepayments if you have a constant source of extra income every year to make additional payments towards your home loan.
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Lump Sum Prepayments:
Contrary to that, you can make a large chunk of prepayment every time you have a hefty bonus or income.
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Budget-Friendly:
Yearly prepayments are a great way to build up financial discipline within yourself, while lump sum ones are dependent on your unpredictable extra income.
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Shorten Tenure:
While the regular payments will help you reduce the loan tenure considerably, those made as a lump sum will bring down the tenure drastically.
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Wise Decisions:
However, it is essential to compare the returns made on the extra amount paid to the bank to the returns it would have fetched if it was invested elsewhere.
Conclusion
Thus, you must make a wiser choice while deciding how you would like to utilise your extra income, to help you get rid of your home loan faster. Moreover, it is always better to make your prepayments annually, rather than all at once. Either way, it will help you save a lot of money in terms of interest in the long run.
Bajaj Finserv offers a wide range of financial services to help you manage your home loan, such as the home loan product and the loan app , that cater to almost every single financial requirement of yours, without putting you through rigorous formalities. All you have to do is go through each and every option available with us to avail the best deal, along with a quick disbursal of funds to make smarter financial decisions.