Loan Repayment Hacks That Can Save You Lakhs In Interest

Obtaining a loan can be extremely helpful for significant expenses, such as purchasing a house, paying for college, or addressing emergencies. However, if you employ clever repayment strategies, you can save a significant portion of the interest. 

Raj, 25 years old, just got his dream job as a content writer and decided to buy a car. To fund it, he took a loan of ₹10,00,000 at an 8% interest rate annually for a tenure of 5 years. The bank asked him to pay ₹20,276 monthly. 

There's a high chance that while Raj is paying an EMI of ₹20,276 for a ₹1,000,000 loan, his friend Priya would pay 20% less than Raj in EMIs.

A little extra payment now can save you big in the long run!

You can scroll down and learn some ways to save lakhs in interest rates on your loans.

1. Opt For Prepayments To Reduce Principal Faster

What Is Loan Prepayment?

Raj took a loan of ₹10,00,000 at an annual interest rate of 10% for 5 years.

He wants to buy a car, but instead of waiting for the monthly loan payments, he decides to pay a big chunk of it upfront.

Paying off something before you have to; that's what a prepayment is. He's covering the cost before each month arrives.

Let's see how the impact of Loan prepayment worked out for Raj:

This is how loan prepayment works: lower EMIs, reduced interest, and faster loan repayment.

How Does It Save Your Money?

Any pre-payment towards the loan goes directly towards the principal and not the interest; thus, the interest component of your EMIs (Equated Monthly Installments) will come down.

• Types Of Prepayment:

• Partial Prepayment: You will be able to pay a lump sum amount over of the fixed monthly EMIs.
• Full Prepayment: The entire loan balance will be paid off before the end of the tenure period.

2. Switch To Bi-Weekly Emis

What Are Bi-Weekly Emis?

Instead of making monthly EMI payments, a borrower can opt for biweekly payments, where they only pay half of 

their monthly EMI every two weeks. 

Since one year is 52 weeks, this results in 25 half payments, equivalent to 13 full monthly payments instead of 12.

As we discussed Raj's financial situation, we will now see what benefit he would get if he opted for a bi-weekly payment.

This extra payment helps significantly reduce both the loan tenure and interest burden.

Therefore, biweekly EMI prepayment results in early loan closure and significant interest savings.

HOW DOES IT SAVE YOUR MONEY?

The biweekly payments will lead to a faster repayment of the principal amount because you are making another EMI payment during the year.

BENEFITS:

• Reduction in a significant part of a loan leads to a faster loan completion time frame.
• Reduced monthly payment time frame.
• Long-term savings of interest are, therefore, substantial.

For example, switching to biweekly EMIs for a ₹10 lakh car loan at 10% interest for 5 years could save Raj, a lot of money, and reduce the tenure by months.

3. REFINANCE YOUR LOAN AT A LOWER INTEREST RATE

WHAT IS LOAN REFINANCING?

Loan refinancing is the act of replacing an already-existing loan with a new, lower-interest-rate one. This especially becomes the case when the general prevailing rates in the market drop or when your credit score improves.

​​Let's assume Raj initially took ₹10,00,000 at an 8% interest rate for 5 years (60 months).

Original Loan Details:

Supposedly the interest rates drop or Raj’s credit score improves, allowing him to refinance at a 5% interest rate for the remaining balance.

Refinanced Loan Details:

Savings from Refinancing:

HOW DOES IT SAVE YOUR MONEY?

Using a lower interest rate for the new loan, you will pay less than the loan you will pay in full. 

POINTS TO CONSIDER:

• Make sure to check if there are any refinancing fees or processing charges.
  
  
• See that you compare the terms and conditions of the new loan against the existing loan.
  
  
• Computing the break-even point will ensure the refinanced loan option is financially attractive.

For example, if you refinance a ₹40 lakh home loan from 9% to 7.5%, you can save ₹6 lakhs in interest over 20 years.

4. USE THE BALANCE TRANSFER FACILITY

WHAT IS A BALANCE TRANSFER?

A technique that lets you transfer your current loan balance to a new lender that charges a lower interest rate or has better terms and conditions is known as a balance transfer.

Suppose Shyama has a ₹1,00,000 loan at 18% interest for 3 years, with an EMI of ₹3,615. The total repayment for Shyama would be ₹1,30,140, including ₹30,140 in interest.

If Shyama transfers this balance to Manoj at 12% interest, his new EMI becomes ₹3,321, and the total repayment is ₹1,19,556, with only ₹19,556 in interest.

SAVINGS WITH BALANCE TRANSFER:

A) Interest Saved—₹10,584

B) Lower EMI—₹294/month

Hence, Balance Transfer makes the loan more affordable and reduces the overall cost.

HOW DOES IT SAVE YOUR MONEY?

The reason you will be able to save on interest payments is that shifting from a higher interest-rate lender to a lower one is also to get offered better rates by better lenders, which is one of the options available for balance transfers.

• BENEFITS:
  
  
• High-interest charge insurance.
• Conditional sale of apartments.
• Loans with processing fees that are of a much lighter kind or without any processing fees at all.

5. INCREASE YOUR EMI AMOUNT PERIODICALLY

WHAT IS EMI STEP-UP?

The process of raising each successive monthly EMI amount by time such that it is directly determined by receiving an incremental amount of the income is called an EMI step-up. In a step-up EMI plan, the borrower starts with a lower EMI, which increases annually, let's say, by 5%.

For a ₹50 lakh loan at 8% for 20 years:

Thus, by increasing EMI with time, the borrower saves approximately ₹12,00,000 in interest and repays the loan 4 years earlier.

HOW DOES IT SAVE YOU MONEY?

Your EMI can also be raised since it is most common to have such loans being the ones with faster completion time periods, thus paying the total interest due of the loan. 

• BENEFITS:
  
  
• The loan duration will be a bit lower.
• They can save a huge sum of money in the long run.
• You can make a manageable increase in the amount of higher EMIs through better income levels.

BONUS HACK: USE THE DEBT SNOWBALL OR DEBT AVALANCHE METHOD

Let us assume you have the following debts:

DEBT SNOWBALL METHOD: 

Pay off the smallest debt first while making minimum payments on the rest.

Suppose you have an extra ₹20,000/month towards your debts. Here is how it works:

Step 1: Pay off Credit Card A first (₹40,000) while making minimum payments on the others

Step 2: Once Credit Card A is cleared, add the ₹2,000 freed up to the Personal Loan (₹5,000+₹2,000+₹20,000= ₹27,000/month).

Step 3: After the Personal Loan is paid, apply the full amount to the Car Loan (₹10,000+₹27,000= ₹37,000/month).

DEBT AVALANCHE METHOD: 

Prioritise the highest interest rate first, regardless of the balance amount.

Step 1: Pay off Credit Card A first (since it has the highest interest rate).

Step 2: Move to the Personal Loan next.

Step 3: Finally, pay off the Car Loan.

WHICH ONE SHOULD YOU CHOOSE?

A.      If you need quick motivation, go for Debt Snowball.

B.       If you want to save the most money, use Debt Avalanche.

CONCLUSION

Loans can be quite a powerful resource to help you reach your financial objectives; however, if they are not handled promptly, they may turn out to be your worst enemy. But applying any of these Five Loan Repayment Hacks will be of great assistance in saving from consequences that matter the most while getting financial freedom faster. 

FAQs

1. Can I repay my loan before the tenure ends?

Yes, most lenders let you repay early, but some may penalise you. Check if saving interest outweighs paying the penalty.

2. How does increasing EMI annually help in saving interest?

By raising EMI 5-10%, you reduce the principal faster to cut interest. This shortens tenure & saves lakhs.

3. Should I refinance my loan if interest rates drop?

Refinancing at lower rates can significantly reduce total interest. But consider processing fees before deciding.

4. Does making extra payments on my loan affect my credit score?

No, extra repayment has no negative impact. Reduce outstanding debts to build credit scores.

5. What is better, getting smaller EMIs and removing the burden faster or having bigger EMIs for a shorter length of time?

Decreasing the time frame with more EMIs will lead to reduced interest repayments, yet one should maintain EMIs that one can readily afford according to one's financial capability. 

6. How do biweekly payments lead to less of the interest?

Biweekly payments result in an extra EMI annually. This results in a faster reduction of the principal, causing a decrease in the overall interest charge, and thus it helps in quicker loan repayment. 

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?