Loan repayment refers to the act of settling borrowed amount with the interest amount. Each lender has distinct repayment clauses. However, all lenders and borrowers can opt for EMI, bullet repayment, balloon repayment, prepayment, or overdraft facility.
Borrowers in India usually choose EMIs as repayment options. This method allows beneficiaries to either opt for part or partial pre-payment or full pre-payment. This is the most viable method as the burden is less, owing to the timely payment.
By opting for timely repayment, a borrower can determine her/their/his creditworthiness. Thus, a positive repayment history and credit utilisation ratio help a beneficiary to improve the CIBIL score. This, in turn, empowers the borrower to acquire loans in future.
Common Loan Repayment Methods
In India, there are several types of loan repayment methods that individuals and businesses can use to pay back their loans. The specific repayment options may vary depending on the type of loan and the lending institution. Some common loan repayment methods in India are mentioned below.
Equated Monthly Installments (EMI)
This is the most common loan repayment method in India. Under the EMI method, borrowers repay a fixed amount every month, which includes both the principal amount and the interest. The EMI remains constant throughout the loan tenure, but the proportion of principal and interest components changes over time.
Another common method is bullet repayment. In this method, the borrower pays back the entire principal amount at the end of the loan tenure, along with the interest that has accrued over the loan duration. This method is often used for short-term loans or loans with a balloon payment at the end.
Furthermore, borrowers can also opt for the balloon repayment option. In this method, borrowers make small regular payments throughout the loan tenure, and at the end, they pay a large lump sum, often referred to as the balloon payment. This method is commonly used in certain types of business loans.