June 25, 2022
Finance

How Prepayment Interest is calculated?

How Prepayment Interest is calculated

Loan interest has always scared the borrower with its amount. Usually in India, home loan repayment is approximately 7-8 years and borrowers usually pay off their installments at the time of annual bonus or at the majority of any investment. In repaying this loan there are many dispute which arises between the borrower and the bank like miss calculation of interest, over payments etc. calculation of prepayment interest is not a difficult task at all but the bank’s staff can easily make it understandable to you. Before interest calculations, understand these points

Monthly balance- every month interest is calculated by the bank on the principal amount. Borrowers usually don’t pay any heed to this parameter. The interest is calculated at the reducing amount which gradually goes down every day. In short the bank will calculate interest on outstanding amount every month. These interests are calculated on the first day of the month. Hence forms the back ground of home loan prepayment interest. Any calculation or recalculation is done on this date only.

Payment date-another point of dispute between the borrower and the bank is about the date. Deposit your check on the same date every month and then your prepayment interest will be calculated prior to that date only.

Number of EMI s- your EMI s will be decided by the bank fully functional after your consent. You can either reduce this EMI s or the amount of such instalments. You just have to submit an application stating your change of requirements.

EMI debit date- the date of EMI has no connection with the prepayment interest. This is confusing and borrowers tend to get confused by assuming their EMI debit in co relation with EMI.

No advance payment of EMIs- Another major confusion which prevails between the borrowers is that EMI s are not deducted in advance rather earlier months EMI is deducted in the prevailing month.