| Topic : Life on Credit |
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Credit Risk Management
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Activity:
16 views;
last activity : 07 06 2010 20:18:09 +0000
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Prepayment
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Step-up repayment
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Step-down repayment
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Accelerated repayment
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Let me first explain about this. Here, the borrower makes a lump sum payment to the lender. This amount is used to pay off the entire loan or a large part of it. The borrower can either close the entire loan or reduce the number of loan installments. This amount is adjusted against the outstanding balance of the loan. |
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My friend has very rightly explained about this. Some banks charge a prepayment penalty that can be as high as 2-3 percent of the outstanding principal. Some banks allow prepayment of certain number of EMIs in a year, without levying any penalty. Prepayment reduces your outstanding balance so that your EMI doesn't rise even after taking into account the higher interest rates.
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This is a new concept. Step-up repayment option allows the borrower a repayment
schedule that is directly linked to his expected growth in income. It makes him
eligible for a larger loan amount though he may only be in the early stages of
his career. He is allowed to pay lower EMIs initially, that is then increased
proportionately with the assumed increase in his income. Young employees can
take a much bigger loan today based on the potential increase in their future
income and buy bigger homes.
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I am very much fascinated by this repayment option. Step-down options are aimed at people close to their retirement years. It is assumed that their incomes are at the peak and hence EMI deducted is huge initially. As the years roll by, the EMI due to the lender decreases. |
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In this option, the borrower can repay the loan faster by increasing the EMI.
When you get an increment, or seen a sudden increase in your disposable income,
you can increase the EMI under this scheme. It amounts to faster loan repayment
and larger saving in the form of interest.
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Let's explore some repayment options available. |
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