Understanding Loan Repayment
When you take a loan, each EMI has two components: principal repayment and interest. In early months, most of the EMI goes toward interest. Gradually, the principal component increases as the outstanding balance reduces.
Amortization Explained
Amortization is the process of paying off a loan with regular payments over time. Each payment covers interest on the outstanding balance and reduces the principal. This is the basis of all EMI calculations.
How to Reduce Total Loan Cost
- Make part-prepayments: Even one extra EMI per year significantly reduces total interest
- Choose shorter tenure: Higher EMI but much lower total interest
- Refinance at lower rate: Balance transfer when rates drop
- Pay on time: Avoid penalties and maintain good CIBIL score
Loan Repayment Priority
If you have multiple loans, prioritize repaying the highest interest rate loan first (debt avalanche method) to minimize total interest paid. Alternatively, pay off the smallest balance first (debt snowball) for psychological wins.
Frequently Asked Questions
What is an amortization schedule?
An amortization schedule is a table showing each loan payment broken down into principal and interest components, along with the outstanding balance after each payment.
How does prepayment reduce loan term?
Part-prepayment reduces the outstanding principal. Banks may either reduce the tenure (keeping EMI same) or reduce the EMI (keeping tenure same). Reducing tenure saves more interest.
What is EMI bounce charge?
If your EMI payment bounces (insufficient funds), banks charge a penalty of ₹300–750 per bounce. Multiple bounces can damage your CIBIL score.
Can I change my EMI amount after taking a loan?
Floating rate loans adjust EMI when interest rates change. You can also make lump-sum prepayments to effectively change your repayment schedule.