has a remaining
loan of R9,38,980. What are the options available?
* Option 1: Switch to a lender offering a lower rate of 10.4% and processing fee of 1%.
After switching, the EMI will change to R13,424 for the remaining nine years. It means he can save R180 (13,604-13,424) every month if he switches to another lender. Here, switching seems to be better than hiking the EMI.
n Option 2: R25,000 part payment at the start of second year.
At 10.1%, total amount payable in nine years = R14,33,214
At 10.75%, total amount payable in nine years = R14,69,227
At 10.75%, total amount payable in nine years with part payment of R25,000= R14,30,385
It means the borrower can save R38,841 if he makes a part payment of R25,000 at once even at 10.75%. It will also reduce the tenure by four months. So, part payment is a good option, provided the borrower has financial backup.
The borrower can also make partial payments at regular intervals, say, every six months or a year, to repay the loan fast and save interest. There are lots of permutations, but proper assessment is required before opting for one.
Finding the best option
These are points a borrower must analyse to decide on the plan.
* Is he comfortable with higher EMIs?
* What is the remaining tenure?
* Are other banks offering loans at significantly lower rates?
* Is he more comfortable with EMIs after single payment, or after multiple lumpsum part payments?
* What are the additional charges for switching to another lender?
In some cases, the borrower might have opted for an increase in tenure when the rate was increased. Then, after a few years, he might have decided to make lumpsum part payments. He will end up paying less and over a shorter tenure. So, it is not relevant how much extra you pay today, but it is important how much you actually pay during the loan tenure.
Loan repayment requires a borrower to understand the basics of handling his finances in the right way. And there are tricks to overcome the nasty hikes in interest rates.
The writer is CEO, BankBazaar.com