Ever heard of loans that help you save money?

When you opt for a home loan, you pay a significant down payment and commit to EMI payments for the next 20-25 years. A vehicle loan leads to EMI payments along with the added cost of owning and maintaining the vehicle. Personal loans too will result in high interest payments for 3-5 years. The common theme in all these loans is the outflow of money.

In such a scenario, the idea that loans can actually help you save money may seem too good to be true. Well, this can be done in two ways.

A cheaper loan to repay a costlier loan

The new loan is significantly cheaper than the first loan. Due to the interest rate difference, you will save Rs. 2 lakhs by using the second loan to repay the first loan despite the shorter tenure. Even if you let the second loan run for five years, you will still save Rs. 1 lakh as compared to the original loan.

How can you qualify for a lower interest rate?

You can take advantage of a fall in interest rates to switch to a cheaper loan. Or, you can switch to a bigger lender offering personal loans at a significantly lower rate and repay the existing high-interest loan. The third option is to get a secured loan to close an unsecured personal or automobile loan. Fourthly, you may consider shifting your job, because even your employer’s profile have an effect on your personal loan eligibility and rate of interest being offered.

Related: How your employer affects your loan eligibility

A shorter loan to prepay a long-term loan

The second option is to make prepayments to a long-term loan such as a home loan.

A look at the amortization schedule of a home loan taken in June 2016 shows how a one-time prepayment of Rs. 2 lakhs in the fifth year will lead to reduction of interest cost by Rs. 15 lakhs

No prepayment