When taking out a loan, the principal and interest components are crucial factors to consider. Lenders often prefer to have a higher proportion of interest and a lower principal component in the monthly EMIs (Equated Monthly Installments) at the beginning of the loan tenure. However, from the borrower’s perspective, it is essential to ensure that the principal starts getting repaid as early as possible. Here’s how you can gradually minimise your principal amount:
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Make Higher Down Payments
Whenever you take out a loan, it is advisable to make higher down payments whenever feasible. This will ensure that the overall sum borrowed is reduced, and consequently, the interest burden is also lower. The higher the principal amount, the more money you will have to pay as interest, and the higher your EMI amount will be. Therefore, it is a wise decision to pay a large amount as a down payment. This not only helps you reduce the EMI of your loan but also saves you money in the long run.
Prioritise Timely Repayments
The first priority when you borrow should be to ensure that you continue to repay on time, with no defaults, and that all the documentation is in order. Once you have settled into the loan, gradually, if your cash flow permits, you should plan for early repayments or pre-closures.
Identify and Tackle the Most Expensive Loans
It is always important to check which loans are more expensive and to work towards the early closure of these loans. This will help you save on interest payments and reduce your principal amount & overall debt burden.
Focus on Home Loans First
As there is usually no penalty for home loan prepayments, and these loans tend to be larger and for longer durations, it may be a good idea to tackle the home loan first. Once you start making part payments and reduce the EMIs, you can then plan for the balance payment and closure of the home loan.
Evaluate Pre-closure Options for Other Loans
In the case of personal loans and auto loans, there are often penalty clauses that are applicable. Hence, it is advisable to first do the math and go in for pre-closures only if it makes financial sense. If you have very few EMIs left to close the loan, it may be smarter to repay the full pending amount and close the loan.
Understand the Terms and Conditions
Repaying a loan or reducing the principal amount is not a general option available or feasible for all loans. It is important to do the math, understand the terms and conditions for pre-closures or part payments, and only then proceed with any such actions.In conclusion, minimizing your principal amount gradually can be achieved through a combination of strategies, including making higher down payments, prioritizing timely repayments, identifying and tackling the most expensive loans, focusing on home loans first, evaluating pre-closure options for other loans, and understanding the terms and conditions of your loan agreements. By implementing these strategies, you can effectively reduce your overall debt burden and save money in the long run.
