Ever heard of loans that help you save money?

The pressure of having to repay a loan, with or without EMIs, can be immense. But did you know that some loans can help you pay off other loans and save money in the process?

ever

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

 

Original

New Loan - I

New Loan - II

Loan amount

Rs. 5 lakhs

Rs. 5 lakhs

Rs. 5 lakhs

Interest rate

22%

16%

16%

Tenure

5 years

3 years

5 years

Total interest payment

Rs 3.4 lakhs

Rs. 1.5 lakhs

Rs. 2.4 lakhs

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.

 

Home Loan

Short-Term Loan

Loan amount

Rs. 50 lakhs

Rs. 2 lakhs

Interest rate

11.2%

16%

Tenure

25 years

3 years

Total interest payment

Rs 1.02 crores

Rs. 60,000

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

Year

Principal

Interest

Total Repayment

Balance O/s

2016

Rs. 22055

Rs. 3,26,057

Rs. 3,48,112

Rs. 49,77,945

2017

Rs. 41312

Rs. 5,55,452

Rs. 5,96,764

Rs. 49,36,633

2018

Rs. 46184

Rs. 5,50,579

Rs. 5,96,763

Rs. 48,90,449

2019

Rs. 51630

Rs. 5,45,134

Rs. 5,96,764

Rs. 48,38,819

2020

Rs. 57719

Rs. 5,39,044

Rs. 5,96,763

Rs. 47,81,100

2021

Rs. 64526

Rs. 5,32,237

Rs. 5,96,763

Rs. 47,16,574

2022

Rs. 72135

Rs. 5,24,628

Rs. 5,96,763

Rs. 46,44,438

2023

Rs. 80645

Rs. 5,16,121

Rs. 5,96,766

Rs. 45,63,795

2024

Rs. 90153

Rs. 5,06,610

Rs. 5,96,763

Rs. 44,73,642

2025

Rs. 1,00,787

Rs. 4,95,979

Rs. 5,96,766

Rs. 43,72,857

2026

Rs. 1,12,671

Rs. 4,84,091

Rs. 5,96,762

Rs. 42,60,186

.

.

.

.

.

.

.

.

.

.

2038

Rs. 4,29,335

Rs 1,67,428

Rs 5,96,763

Rs 12,58,375

2039

Rs. 4,79,968

Rs 1,16,795

Rs 5,96,763

Rs 7,78,407

2040

Rs. 5,36,570

Rs 60,192

Rs 5,96,762

Rs 2,41,836

2041

Rs. 2,41,835

Rs 6,813

Rs 2,48,648

Rs 0

 

One-time prepayment

 

Year

Principal

Interest

Total Repayment

 

Related Article