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Aug 20, 2011, 12.43 PM IST
WE tip you off with smart strategies to help you manage your loans, better.
I took a house on loan and have been paying the EMIs, regularly. The balance amount is Rs 700,000. My yearly interest outgo is Rs 75,000 and I have six more years to end the loan tenure.
I have enough money now to pay off the pending loan amount. Should I pay off the loan amount or continue with the EMI payouts? Please advise.
-- Niraj Kumar, Bangalore
Tip 2: If you have any unsecured debt (credit card or personal loan), pay it off at once! No risk-free investment can ever give you a higher post tax return than the post tax cost of such a loan.
The difference is usually so high that even stiff prepayment penalties of around 3 to 5 per cent will not change the decision.
Tip 3: As a thumb rule (not applicable in all cases), it makes sense to prepay home loans as long as the prepayment charges do not exceed 2 per cent. Two exceptions to this thumb rule:
* Where interest rates on the home loan are lower than the current ruling rate (for example, if you entered into a fixed rate contract earlier).
* If principal repayment of the home loan, increases, the amount of deducted under Section 80C will also increase. This happens if you don't use the Rs 100,000 limit of deduction fully through other modes of investment such as life insurance premiums, contribution to provident funds, etc.
Tip 4: Be aware of the prepayment penalties applicable in your case. Often, customers are asked to sign loan documents with no mention of prepayment penalty.
Tip 5: Prepayment penalties are not written in stone. They are negotiable, and may even be waived if you have a good credit history.
Banks may ignore or reduce the penalty if interest rates climb after the loan has been disbursed, or the loan comes with a lower interest rate than the market rates.
Tip 6: Making partial prepayments is one way to save on charges. Some banks do not charge prepayment penalty if the loan is prepaid, partially. Of course, the definition of what constitutes partial prepayment varies from bank to bank.
As a thumb rule, make sure your prepayment amount is just enough that you still need to pay off a few more EMIs (usually 12), to clear the loan.
This not only saves on the penalty, it also helps you save on high interest costs on a substantial portion of the loan.
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