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What is Loan Repayment and How it Works?

When an individual avails of any type of credit, he/she needs to repay the amount within a fixed tenor. Failing to do so, borrowers have to pay additional fees on top of the outstanding balance. Depending on the credit type, there are several loan payment methods.

However, delayed or non-repayment of a loan indicates poor debt management skills, which may also lead individuals into debt traps.

This is why it is important to know all about loan repayments in detail.

What is Loan Repayment?

Loan repayment is the act of settling an amount borrowed from a lender along with the applicable interest amount. Generally, the repayment method includes a scheduled process (called loan repayment schedule) in the form of equated monthly instalments or EMIs. Such instalments include both the principal and interest components, which need to be paid within a fixed tenor.

How Does Loan Repayment Work?

Equated Monthly Instalments is one of the most popular loan payment methods. In this system, the loan amount is repaid in pre-fixed instalments, comprising both principal and interest components. EMI payments are scheduled every month (loan repayment schedule) on a particular date until the tenor ends, and the debt is repaid completely. However, note that an EMI does not entail an equal percentage of principal and interest.

Typically, in the initial part of tenor, the EMI comprises a higher percentage of interest. Gradually, the interest component reduces and principal component increases.

Take a look at this following example to understand it better -

An individual opts for a personal loan of Rs.10 lakh against an interest rate of 14% for a tenor of 36 months.

In this case, following are the details of his/her loan repayment -

Loan EMI Rs.34,178
Total interest payable Rs.2,30,397
Percentage goes towards interest payment 19%
Percentage goes towards principal payment 81%
Total amount payable (interest +principal) Rs.12,30,397

Individuals can also collect their loan repayment schedule or use an EMI calculator to know their outstanding balance at any given time.

Following is an insight into the types of loan repayment methods prevalent in India.

What are the Types of Loan Repayment Methods?

The loan payment methods usually depend on the credits availed. Following are some of the most common loan repayment options to choose from -

Equated Monthly Instalments (EMIs)
As discussed before, it is a pre-specified repayment schedule that needs to be maintained throughout the loan tenor. However, Bajaj Finserv also allows the customers to repay the loan faster through part-prepayment or loan foreclosure facilities -

  • Repay a part of the outstanding loan balance through part-prepayment. The amount goes towards principal payment. Resultantly, the interest component reduces as the principal is now lower.
  • Pay off the entire loan amount before the tenor ends and foreclose the account.

Bullet Payment
In this mode of repayment of loan, the interest has to be paid every month. At the end of the tenor, the principal can be repaid via a bullet payment. Unfortunately, this loan method is available for only a few credit products.

Hence, before opting for a loan, it is imperative to know about loan payment methods available. It also ensures timely repayment as per a borrower’s convenience.

Did you know, a good CIBIL score can help you get a better deal on loans and credit cards?