What happens if I pay extra amount in home loan?

Benefits of Overpaying Your Home Loan

Overpaying your home loan’s monthly installment (EMI) offers numerous advantages that can impact your financial well-being positively. Here’s how overpaying your loan can make a difference:

Reduced Interest Accrual:

By overpaying your EMI, you effectively reduce the principal balance of your loan immediately. Consequently, the interest calculated on the reduced principal amount will be lower compared to a standard EMI payment, resulting in significant interest savings over the loan’s term.

Accelerated Loan Repayment:

Overpaying your loan allows you to pay down the principal faster. As the interest component is calculated based on the outstanding principal, the reduced principal balance leads to a reduction in interest outflows. This creates a positive cycle where the additional funds applied to the principal reduce the interest, further accelerating the loan repayment process.

Shortened Loan Term:

By overpaying your loan, you can potentially shorten the overall loan repayment period. As the principal is repaid faster, the number of remaining loan installments decreases, leading to a reduced loan term. This earlier loan maturity can save you years of paying interest and allow you to become mortgage-free sooner.

Improved Credit Profile:

Making consistent overpayments on your home loan can enhance your credit score. A higher credit score is associated with financial responsibility and stability, which can positively impact your future credit applications for other financial products, such as personal loans or credit cards.

How Overpayments Are Processed:

Typically, when you make an overpayment, the lender will apply the excess amount directly to the principal balance of your loan. This ensures that the funds are used to reduce the underlying debt rather than being credited towards future EMI payments.

Conclusion:

Overpaying your home loan EMI is a wise financial move that can save you substantial money, accelerate loan repayment, and improve your creditworthiness. By consistently making extra payments, you can significantly reduce the total interest you pay over the loan’s lifespan and potentially become mortgage-free sooner.