Many individuals opt for a personal loan to cover a wide variety of expenses, from home renovation to destination weddings. When you borrow money in the form of a personal loan, you must pay back your loan plus the required interest over a specific period. Read on to understand what a loan repayment plan is and why it is important.
What is loan repayment?
Loan repayment is the process of returning borrowed funds to the lender over a specified period. It involves repaying both the principal amount and any accrued interest, usually through regular instalments. This financial obligation can be for various loans, such as personal loans, mortgage loans, or student loans. Timely repayment is crucial to maintain a good credit score and avoid penalties.
What is a repayment schedule?
The loan repayment schedule is the plan for paying back a loan through a series of scheduled payments called EMIs. These payments include both the amount still owed on the loan and the interest. The schedule usually consists of details like the loan amount, interest rate on personal loan, the tenure, how often payments will be made, and how much interest will be paid in total throughout the loan. The type of loan and the lender's policies may affect the repayment schedules of the loan. They can help borrowers know how much they need to pay each month and when payments are due, which can help them make a budget and plan.
How does personal loan repayment schedule work?
Most loans are paid back through equal monthly payments (EMIs). It has two parts: the principal amount and the interest on it. The principal amount and the interest are paid to the bank or lender on the same day each month until the total amount due is paid off.
You might now assume that the principal and interest components of an EMI are distributed equally. However, it may differ from lender to lender and the type of personal loan you have opted for. The interest portion of an EMI is greater during the first loan period. Also, as the loan tenure nears its conclusion, the interest component decreases while the principal component increases.
What is an amortisation table?
The lender gives the borrower a table or schedule called an EMI amortisation table that shows when the loan will be paid off. Amortisation is how the loan's principal and interest are split up each month over the life of the loan. Most of the time, this table is made with a loan amortisation calculator. Depending on the term of the loan and the personal loan interest rate, the borrower may be able to see how the monthly EMI goes towards paying off the principal and the interest.
Your loan repayment schedule will have the following information:
- Instalment serial number.
- The date on which each EMI payment is due.
- The opening principal amount that shows how much interest will be charged at the beginning of each month.
- The closing principal amount shows how much of the principal is still owed after an EMI is paid.
- Interest rate component.
Additional read: How to plan your personal loan EMI repayment better
What is the importance of a loan repayment schedule?
There are several important reasons why it is essential to repay your loans:
- It can help you decide the loan amount to borrow
It is important to look at the EMI amounts and loan repayment schedules before choosing the amount, to ensure that it fits within your repayment capacity. You can analyse how it will impact your fixed obligations to income ratio (FOIR) and choose an amount accordingly.
- It can help you in planning partial or full prepayments
You can save money on interest costs in the long term by paying off the loan early. The earlier you repay your debt, the less interest you will ultimately pay, since the principal on which the interest is calculated, gets reduced with prepayments.
Additionally, your payment history is one of the most crucial factors in determining your credit score. Maintaining a regular schedule of loan repayments will help you avoid damaging your credit score.
Therefore, it is essential to be aware of the loan payment options before choosing a loan. It also ensures timely repayment based on the convenience of the borrower.
Click here to calculate your EMIs and view the repayment schedule.
