Loan repayments: 5 distinct key structures
What's the story
Navigating the world of loans can be tricky, especially with the various repayment structures available in India. Knowing these options is key to making informed financial decisions and avoiding unnecessary debt. Be it a personal loan or a home loan, knowing how repayments work can save you money and stress. Here are five distinct loan repayment structures commonly used in India, along with their pros and cons.
#1
Equated Monthly Installments (EMIs)
EMIs are the most common form of loan repayment in India. Borrowers pay a fixed amount every month until the loan is paid off. The EMI includes both principal and interest components, which change over time. This structure allows borrowers to plan their finances better as they know how much they'll pay each month.
#2
Bullet repayment
In bullet repayment, borrowers pay only the interest during the loan tenure and repay the principal amount in one go at the end of the term. This structure is generally used for short-term loans or working capital finance. While it provides lower initial payments, borrowers must be careful about having enough funds to pay off the principal when it's due.
#3
Graduated Payment Plan
A graduated payment plan starts with lower initial payments that increase gradually over time. This structure is ideal for borrowers expecting their income to rise steadily in the future. However, it may lead to higher overall interest costs as compared to fixed payments.
#4
Flexible repayment options
Flexible repayment options allow borrowers to adjust their payment schedules based on changing financial circumstances. This could include making higher payments during certain periods or skipping a few installments without penalty. Such flexibility can help manage cash flow effectively but may require careful planning.
#5
Step-up loan scheme
A step-up loan scheme involves lower initial EMIs that increase at predetermined intervals throughout the tenure of the loan. This approach caters to borrowers expecting higher earnings over time. It makes it easier for them to manage early-stage financial constraints. They can gradually increase their repayment capacity.