Are you trapped in an endless cycle of EMIs? Despite making regular payments, your loan principal just won’t budge! Unravel the mystery behind this persistent problem and find out how to break free from the EMI loop once and for all!
Why Does Your Loan Principal Remain Unchanged?
Interest Component: When you pay your loan EMIs, a significant portion of the initial payments goes towards the interest component of the loan. During the initial years of a loan, the interest portion is higher, and the principal repayment is relatively lower. This results in a minimal reduction of the principal balance.
Change in Base rate: Every loan is tied to a base rate, such as the repo rate, the PLR, the MCLR, the TBLR, etc. When you apply for a loan, the bank adds a premium or a discount to the base rate to determine the final rate for your loan. Although your applicable rate fluctuates during the loan period owing to changes in the base rate, the bank frequently doesn’t modify your EMI. Due to the fact that EMIs are fixed, borrowers are frequently unaware of changes in applicable rates, resulting in larger interest payments and lower principle payments.
What Can You Do to Address the Situation?
Analyze the Loan Terms: Take note of the interest rate, loan tenure, and repayment structure. This will help you gain clarity on how your EMIs are being allocated towards interest and principal.
Review your Loan on regular basis: On Regular interval review your loan account. Contact your lender and request a repayment schedule for your loan. This revised schedule will provide a detailed breakdown of the principal and interest components for each EMI payment. It will help you visualize the progress of principal reduction over time.
Consider Making Part Prepayments: If you have surplus funds, consider making part prepayments towards your loan. By reducing the principal amount, you can shorten the loan tenure and decrease the total interest paid. However, be sure to check with your lender regarding any prepayment penalties or fees.
Explore Rate reduction Options: Sometimes there is gap between your applicable rate and bank offering at that particular period of time. This can involve negotiating with the lender to reduce the applicable rate. However, keep in mind that restructuring may have its own associated costs and implications, so carefully evaluate the pros and cons before proceeding.
Seek Professional Advice: If you’re still unsure about the best course of action, it is advisable to seek professional advice. Financial advisors or loan counsellors can provide personalized guidance based on your specific situation and help you develop a suitable repayment strategy.
The situation of paying regular EMIs without witnessing a substantial reduction in the loan principal can be disheartening. However, understanding the underlying factors and taking proactive steps can help you navigate through this difficulty more effectively. Remember, the initial stages of loan repayment are typically dominated by interest payments, and the principal reduction gradually gains momentum over time. By analyzing the loan terms, considering part prepayments, exploring rate reduction options, and seeking expert advice, you can make informed decisions and work towards reducing your loan principal more efficiently.