You have an option to pre-pay loan amount | india | Hindustan Times
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You have an option to pre-pay loan amount

Most people consider various aspects of the loan process before making their decision. However, one point that they often ignore is about prepayment, Arnav Pandya tells what not to miss.

india Updated: Aug 02, 2008 02:38 IST
Arnav Pandya

Most people consider various aspects of the loan process before making their decision. However, one point that they often ignore is about prepayment. Now with the rate on floating rate loans on the rise, as the interest cost jump in the economy, this has become an important factor. Here is a look at the entire position and how one can cut cost.

Prepayment

Prepayment of the loan refers to a process whereby the person who has taken the loan is able to pay off the amount before the schedule laid down. A normal loan repayment will involve the payment of an equated monthly installment for the time period of the loan.

If a person wants to pay off the amount before this tenure that can stretch quite long for a housing loan, then this is called a prepayment. The best position for the individual loan taker is when there is no prepayment penalty.

Reducing penalty

One of the best ways to reduce the cost of prepayment is to go in for a floating rate loan. Often this might seem to be a costly choice at first sight because rates might be lower elsewhere. But there is likely to be a prepayment option in a floating rate loan. In several cases, especially with leading home loan providers, there is no penalty for such prepayments.

This means that while taking a housing rate loan, look specifically for this point and make a comparison of the various situations where such a penalty is present or absent.

Number of payments

There is sometimes a catch in prepayments. This refers to the number of times a person can prepay on a particular loan.

Most people think of prepayment as a one-time option but this is not true. There can be several prepayments as a person keeps repaying the amount as and when it becomes available with him. This can also be a strategy as the prepayment can be made when the conditions are not favourable. Any restriction on number of prepayments has to be considered when devising repayment strategy because this will dictate the manner in which a person will behave over a period of time with respect to his loan.