Should you pre-pay your loan?

Pre-paying a loan is both an emotional as well as a financial decision. If you are keen to know whether pre-paying any loan would make financial sense, you need to read on...

After taking a loan, usually one lands up in a situation that pre-payment of the loan becomes a possibility after a few years of serving the loan. Should you just go ahead and prepay the loan or should you do a proper analysis and arrive at a logical decision?

Emotional Decision

Since prepayment of loan is both an emotional as well as a financial decision, it is better to clear the first things first, and that is to look at the emotional aspect. If the EMIs are causing you or your family any mental stress, then there is no need to even look at the financial aspect - because you can make more money from somewhere else, you just have one body and you do not want to ruin it by taking stress.

Financial Decision

Only in case you are emotionally inclined to both the possibilities, that you should try and make a financial assessment of this decision.

When it comes to a financial decision, these are some of the parameters that you need to account for since they have a direct impact on your decision:

1. Principal Amount outstanding
This is the amount you will have to pay to the bank, in case you decide to pre-pay the loan. This amount should be available with you in liquid form so that it can be prepaid. This is also the amount that can, alternatively, be invested somewhere else to get better returns. So, this amount becomes one of the key amounts in our calculation.

2. Interest Amount Outstanding
This is the amount of interest that you would pay the bank from now on if you happen to continue with the loan as it is. This figure is easily available in your bank's amortization schedule. Through our calculation, we are going to judge whether we can get better returns by reinvesting the principal, or by prepaying the loan.

3. Remaining Loan Tenure (months)
This is the number of months remaining in your loan tenure in case you continue the loan. This is the time available for an investor to try and get better returns than the interest yet to be paid to the bank. 

4. EMI Amount
This is your current Equated Monthly Installment that you are paying to the bank, and would continue to pay in case you continue with the loan.

5. Tax Bracket (percentage)
This is the current income tax assessment tax bracket. This is important especially in the case of home loans since you also are likely to be claiming tax exemptions on your interest part of the home loan,  over and above the principal part.

6. Avg Expected Returns (percentage)
These are the average annual returns that you are confident of getting if you were to re-invest the money rather than prepay it to the bank.

How to arrive at the decision?
You can use our online calculator to arrive at an informed decision regarding your loan prepayment. 

Just go through the below steps:
1/ Login to our Official Website
2/ From the Home Page, go to Wealth Management Tools
3/ Under Wealth Management Tools, visit Thumb Rules & Calculators
4/ Under Thumb Rules & Calculators, browse to Loans -->Should I prepay my Loan?
5/ Enter the required data and click on Proceed to look at the decision, as well as a detailed analysis.

Applicability of the Loan Pre-Payment Calculator

This loan pre-payment calculator is applicable for all kinds of loans whether it is a home loan, personal loan, vehicle loan, or any other loan where EMIs are structured in a way that both principal and interest are paid as a part of the EMI.

Unique Features of the Loan Pre-Payment Calculator
1/ It can suggest you where to invest your money based on the performance of your assets, assuming ofcourse that you have been tracking your assets on the website.
2/ It will estimate and tell you how much additional wealth will you create if you go by the decision of the calculator.
3/ It accounts for your tax savings based on your income tax slab.

Happy decision making!

Thanks and Regards

Manoj Arora
Official Website