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When any business or individual borrows money from a lender, it needs to be paid back. However, there are ways and methods for such repayment. This article will highlight what a loan repayment is, why it is important to make timely repayments, and the methods of repayment.
What is a loan repayment?
When any business obtains a business loan from a bank or NBFC, it needs to be repaid. So, the repayment is an act of paying off the loan in a structured manner in the specified tenure. Bank or NBFC draws a business loan agreement, which includes details such as loan repayment tenure, rate of interest, the methods of repayment, and the terms and conditions of repayment.
Commonly, business loans are repaid through EMI or bullet payment methods.
Methods of business loan repayment
As mentioned earlier, mainly, there are 2 types of repayments:
Equated monthly installments:
Equated monthly installments are also known as EMIs. Here, the borrower pays the lender every month. The date for repayment remains constant every month. Also, the amount to be paid remains the same. By paying a specific amount every month for a certain period, the whole loan amount along with the interest is repaid to the lender.
Loan tenure has a direct impact on the amount of EMI. Higher EMI, lesser loan tenure, and vice versa. Here is how EMI is calculated.
In this type of payment, only the interest amount has to be paid every month in the form of an EMI. One bullet payment has to be made to the lender to repay the principal amount. This single bullet payment is generally scheduled by the end of the loan tenure.
Bullet payment is not a very popular method of repayment, and it is available only for a few loan schemes offered by banks and NBFCs.
Other voluntary repayment methods:
Even if you are paying an EMI, you still can repay the loan partially or fully to close it before the tenure ends. Here are two ways to do so.
Partial payment: Partial payment is also known as part payment. Here, you make payment of the loan amount partially. Such payment is over and above your EMI for the month. For example, if you have obtained a business loan of ₹1 lakh and your EMI is ₹1500. In a certain month, you pay your regular EMI while you make a partial payment of the loan by paying ₹20,000. Such part-payments save the interest on the entire amount and enables to close the loan before the actual loan tenure.
Foreclosure: Foreclosure of the loan means that you pay the entire remaining amount of the loan along with the interest to date in one go. This saves interest to be charged for future months. However, you need to have lumpsum funds available to foreclose the loan.
Explaining this by an example, if your business loan is ₹1 lakh obtained for 5 years. However, by the end of the second year, you may have a lumpsum amount to repay. The bank will calculate the remaining principal amount, which may come to ₹65,000 while interest is about₹5,000 (hypothetical example). Then, you pay ₹70,000 to the lending institution to foreclose the loan. You will not have to pay EMI in the future months.
Examples of loan repayment of different banks
Here are step-by-step procedures of loan repayment of different banks.
|Bank names||Steps to repay the loan|
|ICICI Bank loan repayment||
|HDFC Bank loan repayment||
|LIC loan repayment||
|SBI loan repayment||
Why timely loan repayment is important?
Loan repayment is not only about settling your liabilities, instead, it has several other benefits too.
- Reducing loan liabilities: One of the major reasons why timely loan repayment is important is because it reduces loan liabilities. With each passing EMI, your loan liability is reduced.
- Improved credibility: Timely repayments indicate that you are serious about making timely payments of the loan and borrowings. Therefore, it improves your credibility.
- Credit score: The credit score such as the CIBIL score can be improved with the regular repayment of existing loans.
What if you don’t repay the loan?
Non-repayment or delayed repayment of a business loan has several implications. Here are they:
- Fines and charges: While the business loan agreement is drawn, a scenario of non-payment is considered. The clause of non-payment or delayed payment usually suggests a fine to be charged on the delayed days. In other words, your repayment amount increased.
- Collateral: In the case of a collateral business loan, the lender can liquidate your promised asset. In such a scenario, you may end up losing your existing assets.
- Credibility: Losing credibility is yet another serious dent. Since your reputation is damaged, suppliers may not have the trust that you would clear the payments. In such a case, either they will not offer you any credit period for payment or they may refuse to do business with you. This will have a direct impact on your business.
- Credit score: Another serious consequence of not making timely repayment of a business loan is it directly affects your credit score. Low credit score results in the rejection of loan applications in the future.
- Blacklisting: In extreme cases, your business will be blacklisted. It means that your business will neither be able to obtain any loans nor it will be eligible for any government loan schemes.
Above mentioned are consequences of non-payment of EMIs. However, if you are stuck in a financial challenge and are not able to make timely payment, you can reach out to the lending institution before the due date of your EMI. Let the lender know about the financial difficulties. It may be so that the lender would help you with some workable solution.
Concluding remarks: tips to ensure timely repayment
When you have obtained a business loan, here is how you can ensure that you have enough funds to make timely payments of your EMIs:
- Understand your loan repayment schedule and organise your finances accordingly. Keep the follow-up with your customer strong for timely payments. This will ensure a constant inflow of funds.
- Try to keep some contingency funds. This fund will help you make a payment of your EMI, in case customer payment is delayed or any other financial challenges.
- Delay unnecessary expenses. You can save some money by delaying unnecessary expenses, which will turn help you to pay EMIs on time.