Saturday, April 29, 2017

Clear your debts by part payments

Every one of us, most likely has one or the other type of loan. Those who dont, I must say that, they are indeed blessed
Loan is not a bad thing to have. It gives one the ability to buy something(preferably an asset), at a earlier time, and slowly pay over a period of time.
Though it's a good thing, but at the same time, you need to understand that, it's from  the interest which you pay, which gives banks all the profits and also manage to pay the salaries of all their employees. Not a small amount eh ?
So the earlier you reduce you loan amount, the better for you, from your savings point of view.



Let me give you an example, which will tell you, how much you can save by doing a early part payment.
Assume you have taken a housing loan of 20 lakhs and your monthly EMI is roughly 20,000/-. An EMI will have a principal component as well as an interest component. In the initial years your principal component will be very less, while your interest part very high, and this will change over the years.




So, if you happen to make a part payment of say 25,000/- or 50,000/- it will make a big impact on the number of EMI's which you have to pay, if done in the early years. While the same amounts will not have the same impact in the later years. Nevertheless, its always beneficial, whenever you do the payments, it always helps to reduce to total out go from your accounts

Here is the table below, which shows the EMI for 20 Lakhs for 20 years at 11.75% Interest.
S.No
Monthly Installment
Interest
Principal
Balance
0



2000000
1
21674
19583
2091
1997909
2
21674
19563
2111
1995798
3
21674
19542
2132
1993666
4
21674
19521
2153
1991513
5
21674
19500
2174
1989339
6
21674
19479
2195
1987144
7
21674
19457
2217
1984927
8
21674
19436
2238
1982689
9
21674
19414
2260
1980429
10
21674
19392
2282
1978146
Only the first 10 Installments are shown above. But you an see, that even though in the Initial months, you are paying 21674/- as EMI only 2091/- is used to pay up the Principal amount, and a huge amount of 19583/- is used up for the Interest.

So, practically, close to the end of 1st year, if you pay up 25000/- as part payment, close to 10 EMI's worth of Principal, you would be paying in a single transaction. (its an approximation as 10th months principal is 2282/-. and 25000 divided by 2300 will be approx 10.

So technically, the effort required by the next 10 EMI to pay up that 25,000/- has been taken care.
Which means, by paying 25,000/- you have saved up paying 25000 x 10 = 250,000/- ie Two Lakh Fifty thousand. Thats quite a saving and you also end up completing the EMI's earlier :)

So whatever be the case, always try and pay up as much as possible. Try for 25000/- per quarter to pay up and it will help you a lot.

Money saved is also money earned.

If you like this article kindly share with others.






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