Home loans are a popular option for people looking to buy their dream home, but it is a long-term commitment. A home loan usually has a tenure of 10-20 years, and during this time, borrowers have to pay Equated Monthly Installments (EMI) on time. However, many borrowers opt for pre-payment, i.e., paying the principal amount ahead of time in addition to the regular EMI. But the question is how correct it is to opt for pre-payment and whether it benefits the lender or has disadvantages. In this article, we will discuss the pros and cons of pre-payment for a home loan.
What is Loan Pre-Payment?
Loan pre-payment refers to paying an additional amount on top of the monthly EMI. When a borrower makes a pre-payment, the additional amount is deducted from the principal amount. This, in turn, reduces the loan amount and reduces the tenure of the loan, which helps to lower the EMI amount.
Benefits of Home Loan Pre-Payment
Opting for pre-payment for home loan repayment has many advantages, some of which are:
1.Reduce Debt Burden
The first advantage of pre-payment is early redemption of the loan taken as a home loan. The principal amount is reduced due to the earlier payment, which also reduces the tenure of the loan. This means that the borrower can become debt-free sooner.
2.Relief from Interest Burden
As the loan amount decreases, the principal amount also decreases. This way, the next time you have to pay interest, it will be on the reduced principal amount, which also reduces the EMI to be paid every month. In this way, the borrower can save lakhs of rupees.
3.Improve Credit Score
It is important to have a good credit score to avail of any loan. By early repayment of the loan, it increases the trust of the lender towards the borrower and helps in getting the loan easily the next time. Thus, pre-payment helps to improve the credit score.
4.Payment Facility as per Budget
Pre-payment gives the borrower the flexibility to pay any amount as per their budget and requirements. Whenever the borrower has some extra money, they can pre-pay the loan. This helps to save on interest in the long run.
Disadvantages of Home Loan Pre-Payment
Opting for pre-payment for home loan repayment may come with some disadvantages, which are:
Home loan EMIs are already high, and paying an additional amount along with the EMI can disrupt the borrower’s budget for the month and the months ahead. It can lead to a decrease in the cash amount, leading to a cash crunch.
Many times people use their savings to pre-pay the loan. This allows the loan to be repaid quicker, but if the savings were invested somewhere else, it would have fetched better returns. This is called the opportunity cost in financial terms. Therefore, before pre-payment, the borrower should check this cost thoroughly.
Q. Can pre-payment affect the credit score?
A. Pre-payment can actually help to improve the credit score. By paying off the loan early, the borrower shows responsibility and good financial management, which can reflect positively on the credit score.
Q. Is there any penalty for pre-payment?
A. No, there is no penalty for pre-payment if the loan is taken on a floating interest rate. However, if the loan is taken on a fixed interest rate, there may be a penalty for pre-payment.
Q. Is it mandatory to opt for pre-payment?
A. No, it is not mandatory to opt for pre-payment. It is up to the borrower to decide whether they want to opt for pre-payment