Paying the home loans EMI is a kind of major responsibility on the borrower after availing loans. Loans have once taken need to be paid back on time within the due date of every month to avoid getting penalized, and the CIBIL score from getting reduced. The borrower needs to do proper financial planning to manage the overall expenses of the basic necessities and also to manage to pay the installments on loans. The expenditure on unnecessary expenses should be curtailed while taking loans. It becomes easy for the borrower to repay the loans in case of the joint loans being taken. A joint loan helps to share the borrower’s responsibilities and thus does not over-burden a single borrower. Home loans can be availed at competitive interest rates in case of choosing the right lender who can provide loans at lower interest rates. Taking loans at lower interest rates helps reduce the burden of the repayment substantially on the borrower as the home loans interest amount is calculated on a cumulative basis. The home loans are available for a tenure of a maximum of 30 years to the borrower. However, the actual approval depends upon the age of the borrower. The age of the borrower should be up to 30 years of age to avail of loans for the next 30 years.
The interest rates start from 6.50% onwards for the home loans. The interest rates have continuously been reducing due to the falling rate of RBI, which enables the banks to lend the loans at lower interest rates. The home loans need a minimum CIBIL score of 650 on average to get the home loans approved. The faster the payment of the loans lower is the repayment value being charged to the borrower. The bank, most of the time do not charge any pre-payment penalty to the borrower these days as banks are keen on the recovery of the loans. Banks are very cautious that the loans should not turn into bad debt or non-performing assets. The banks also charge processing fees to the borrower, which could be somewhere about 0.25%-1% of the loan amount or Rs.10,000, whichever is lower. Processing fees are part of the recovery being done by the bank for the processing of the loan. Also, the bank incurs some costs for the third-party verification of the documents.
Benefits/disadvantages of the investment of the funds rather than faster repayments
- Funds being invested can yield better returns to the investor as the stocks or mutual funds can yield returns on an average 10% year-on-year basis as returns. Also, the investments done are non-taxable.
- The long-term running of the loans can help the borrower avail tax benefits for a longer duration of time. Thus in the long term, if the existing funds are invested, and the normal payment of the EMI’s is continued, then the long-term benefit of the tax can be taken by the borrower under the income tax act 80C and section 24.
- The borrower can utilize the funds in the later stage of the repayment at the end from the returns gained on the investment.
- Sometimes there is a possibility of a market crash which can lead to a loss in financial markets like stocks & mutual funds, which can lead to a loss for the borrower.
Benefits/disadvantages of faster repayments of the loans
- The early repayments of the loans can help the borrower become early debt-free and get the liability reduced on them by becoming early debt-free.
- Early repayment can help the borrower save money on early repayment of the loans. Thus the borrower can save money on financial investments.
- Early repayment can also help the borrower improve the CIBIL score in certain cases as there is a clear credit history been seen of the borrower due to early repayment.
- In a very rare case, it can be mentioned in the clause agreement that pre-payment of the loans may attract a penalty to the borrower. This can lead to the borrower paying an extra charge. Thus if such a clause is being mentioned in the agreement, then, in that case, it is not recommended that the borrower should pre-pay the loans. Thus loans should be taken from such a lender who does not charge any penalty on the borrower for pre-payment; instead, the rebate is being provided for early repayment.
The borrower should pre-pay the installments rather than invest the money in stocks or mutual funds, or insurance. Early repayment can help the borrower become early debt-free. In case of the excess money gained, there is uncertainty on the returns over the investments; rather, it is better to pre-pay the loans, which can lead to the assured benefit of rebate being provided by the bank on pre-payment.