Home loans are an integral part of home purchases due to high prices; many people cannot buy the property without the loans. The home loans are charged at interest rates of 6-9% per annum. The interest rates on the home loans are continuously declining as the Repo rate of RBI is continuously decreasing. The interest rates are becoming more and more attractive to home buyers. If the borrower pays the number of installments early, the buyer can avail rebate on the home loans amount and thus can avail discount on the repayment value. Therefore loans can be taken either on the fixed interest rates or else floating interest rates according to the borrower’s choice. In case of faster repayment of the loan amount, the borrower can save money on the interest repayment. The loans can be taken for a tenure of a maximum of 30 years, depending on the borrower’s age. These days, most banks have withdrawn the penalty being charged on the early repayment of installments; in fact, the banks offer a rebate on early repayment of the loans; thus, the borrower can save money against early repayment.
The banks charge a penalty on the non-repayment of the installments or the delay in payment of loans beyond the due date. Due to the banks’ bad debts are on the rise, banks expect that the borrower should repay the loans as early as possible. The banks approve the loans of only applicants with a minimum credit score of 700 points and above. However, sometimes banks may approve the applicants’ loans with a lower credit score on a higher interest basis. There are some lenders amongst the NBFC’s who charge home loans interest rates as high as 18%. The borrower can avail of competitive interest rates only in case of a good credit score. It is always better to prepay the installments as the borrower can become early debt-free from the liability of the loan. Banks also charge processing fees on the loans for the cost required for verification like credit score, third party verification of the documents, physical verification of the property.ETC. The applicant can avail of tax benefits under the income tax act 80C. The government of India encourages people to buy properties by availing of loans. The government aims for “housing for all” for the betterment of society and to boost the real estate sector.
Reasons for utilizing the annual bonus for early repayment of EMI:
- To become early debt-free:
Annual bonus is the bonus amount paid by the companies as part of the employee’s overall performance. The better the performance, the better is the bonus amount paid to the employee. Thus, if utilized for the early repayment of home loans, the tenure of the loans can get reduced, and the borrower can become early debt-free. Therefore it is always better to invest the excess amount gained for the faster payment of installments.
- Rebate gained on the installments:
The borrower can expect a rebate on the home loans to pay for the early repayment of the loans. As the bank’s NPA[non-performing assets] are increasing, there is a possible effect that banks encourage the borrowers to repay the loans as early as possible. Banks provide the rebate on the installments being paid. Thus the borrower can save money on the interest repayment and can become early debt-free.
- A better choice to prepay loans:
It is always recommended to repay the loans early as the borrower in the initial stage of prepayment can save money on the repayment of interest. The borrower should use the EMI calculator to estimate the amount of the installments. In the very rare case, there are banks that charge foreclosure charges; thus, the terms and conditions of the loans should be read thoroughly by the borrower. If no penalty is charged, the borrower should try to repay the amount as early as possible to become early debt-free.
- Improvement in CIBIL score:
The borrower’s credit score may get improved in case of the early payment of the installments. A better credit score helps the buyer to avail of future credits easily. Thus, utilizing the excess amount gained as an annual bonus can help the borrower improve their credit score even better. And also, for the future loans availed, the applicant can better negotiate the interest rates being charged, thus helping the borrower with the financial benefit through the improvement of credit score.
The banks can provide the rebate to the borrower on early repayment. Thus the borrower can save money on the interest repayment, as banks are keen on recovering the money as early as possible. Thus, it is highly recommended that the borrower use the credit score to repay loans installments faster.