When you take out a personal loan, you have a fixed EMI payment each month. However, the longer the loan term, the higher the total interest you will pay. Therefore, by planning and reducing the principal in advance, you can save a significant amount of interest.

Suppose you take out a personal loan of ₹5 lakh for 5 years at an interest rate of 12% per annum. The EMI for such a loan is ₹11,122. After paying EMIs for 60 months, you will have a total of ₹6.67 lakh.

1. Make part-payments: In addition to regular EMIs, you can reduce your principal by making a lump sum payment. For example, after paying 12 EMIs, a part-payment of ₹1 lakh can reduce your outstanding principal loan balance of ₹4.22 lakh to approximately ₹3.22 lakh.

2. Reduce the loan term without reducing the EMI: It may be more beneficial to reduce the loan term by keeping the EMI as low as possible after part-payment. In the given example, the loan can be repaid in 47 months, resulting in interest savings of approximately ₹45,000.

3. Use bonuses or incentives: Using a portion of bonuses, incentives or other lump-sum income for part-payment can reduce the outstanding principal amount faster.

4. Pay an extra amount once a year: Even if you don't have a large amount available, you can still pay an extra amount, even equivalent to one EMI, into the loan once a year as per your capacity.

5. Check charges before foreclosure: Before closing the loan, check the bank’s prepayment or foreclosure charges. It's important to compare the interest savings with the charges incurred. Also, check whether you have enough savings left over for emergencies when you repay the loan.

Simply put, while repaying a personal loan early, it is important to reduce the principal amount, reduce the tenure and check the extra charges rather than just reducing the EMI.

PC: NEWS18HINDI