7 types of personal loan repayment method: Which one is best suited for you? | Mint

Managing loan repayment properly can really make a difference in your financial health. With so many choices available, it is essential to choose the right one that will meet your financial goals and circumstances.

Let’s understand the different kinds of loan repayment strategies, their advantages and disadvantages, and help you make better choices. Whether a novice or seasoned borrower, learning these tactics will expedite the payoff process and ensure financial stability.

Understanding personal loans

A personal loan is essentially an unsecured loan for which a large amount of money can be received for purposes that one might want, like any medical crisis, house improvements, travel, and also any form of debt consolidation. One, however, should analyse before applying for one, all areas such as interest rates and repayment terms, eligibility criteria etc., so that the loan satisfies one’s financial needs.

What is loan repayment?

Repayment is the process of paying off loans, usually monthly, in both the principal borrowed and the interest incurred. Repayment time may be from a few months to years depending on the amount borrowed and terms of the loan. Failure to observe the repayment schedule attracts fines, destroys your credit score, and ruins your credit history.

Types of loan repayment

Here are some typical loan repayment schemes adapted for different financial demands and preferences:

1. Fixed-rate loans: These loans have a constant rate of interest during the term, meaning the payment becomes flat monthly and predictable. Therefore, fixed-rate loans make budgeting very easy, especially for clients who crave financial stability.

2. Floating-rate loans: The floating-rate loans have an interest rate that is determined by market conditions. Although they might start with lower interest rates, fluctuations can cause unpredictable monthly payments. These are best for borrowers who do not mind variable costs.

3. Balloon loans: Balloon loans involve a borrower paying small monthly payments during the term of the loan. A large “balloon” payment is paid at the end. That is a great option if you think you’ll have substantial funds available later to reduce the balance.

4. Bullet repayment loans: Borrowers in this arrangement only pay interest during the period of the loan, while the principal is paid in full at the end. This may be useful for short-term borrowers who are expecting a lump sum at the end.

5. Amortising loans: These loans divide the repayment into set EMIs, which include both principal and interest. At the end of the term, the loan has been completely repaid, which brings clarity and structure.

6. Interest-only loans: Borrowers pay the interest of their loans throughout the term, keeping the principal undisturbed. One has to repay the major amount in a different term, at times all together, by the end of the term.

7. Partial loan payments: Partial payments enable loan clients to make further payments against the principal at any point, reducing the outstanding sum borrowed and therefore reducing the possible period of a loan.

Tips for repaying loans quickly?

1. Pay more than minimum: Whenever feasible, make extra principal payments to lower the loan balance faster and save on interest.
2. Increase the EMI: If it is possible for you, increase your monthly instalments. This is a speedy way of payment with minimum interest cost.
3. Apply windfalls: Use the bonus or income tax refund money in the form of a lump sum to pay the debt.
4. Cut wasteful expenses: Reduce discretionary expenditure and use the savings to repay the loans.
5. Debt consolidation: If you have multiple loans, you can consolidate them into one loan at a lower interest rate so that you pay less money and also pay less time.

Conclusion

The selection of appropriate loan repayment methods that makes or breaks good financial management. Effective debt repayment needs proper planning on the financial aspect, tight budgeting, and consistency of payments. Prioritization of your debts, including changes in your method of repayment, can assist one in being debt-free with long-term security.