Personal loan repayment: What it means & how it works? | Mint

Loan repayment is the process of paying back borrowed funds with interest over a specific period of time. It is an important component of personal and business finance ranging from small personal loans to bigger mortgages and corporate credit. Properly managing your loan repayments is vital for financial stability and protecting your credit score.

Understanding personal loan

A personal loan is an unsecured loan provided for several purposes, such as debt consolidation or funding home improvement projects. It’s also useful for medical expenses or financing a journey. Flexible, quick-to-access funds are granted without the need for collateral, although it is necessary to evaluate certain factors beforehand, including interest rates and repayment terms, with all types of fees attached, before applying for it.

Key components of personal loans

Key components of a loan are to be understood to manage it effectively. These are:

1. Principal amount: It refers to the amount one borrows from a lender.
2. Interest rate: The cost of borrowing is determined by the annual percentage rate (APR). Rates vary depending on the type of loan and the lender.
3. Loan tenure: It is the period of time by which the loan must be repaid. Loan terms might last from a couple of months up to several years.
4. EMIs (Equated monthly instalments): They are fixed monthly payments that include both principal and interest. The number of instalments varies according to the loan tenure.

The process of loan repayment

Loan repayment is the payment of borrowed money. It is usually paid monthly till the full amount, including the principal and interest, is paid. This type of repayment is applicable to personal loans, mortgages, vehicle loans, and student loans. The repayment process can be according to set timetables or simply be an amortisation plan. Getting your pay on time is necessary to maintain a good credit score, as well as to prevent penalties or defaulting.

Factors influencing loan repayment

Several factors influence how easy it becomes for you to repay the loan:

• Loan tenure: Longer tenures translate to lower monthly EMIs but more total interest paid.
• Loan amount: The higher the loan amount, the higher the EMI.
• Interest rate: A slight change in the interest rate dramatically alters the total cost of the loan.
• Prepayment: Paying a part or the whole of a loan can reduce the interest rates, although some financiers charge prepayment fees.

Dealing with loan defaults

If you are experiencing difficulty in settling the debt, consider the following options:

1. Talk to your lender: Try to reach them early to discuss resolutions such as debt restructuring or temporary moratorium.
2. Loan extensions: To reduce the burden of loan servicing, some lenders allow longer tenures or reduced EMIs at the cost of higher aggregate interest outgo.
3. Avoid legal issues: Defaulting may lead to litigation and asset repossessions. It is important to explore all the options to avoid such situations.

Effective loan repayment strategies

Some effective ways of repaying loans:

Conclusion: It is impossible to borrow responsibly without understanding personal loan repayment. Knowing the basic issues of repayment terms, interest rate, and pay-back schedule will help to make proper financial decisions and avoid pitfalls. Regular payments can make a big difference in credit scores and future lending opportunities.