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Borrowing money? Choose the right repayment option

January 13, 2010 10:59 IST

Most emergency situations in life would need money to face it. And what happens if you don't have any money? Well, the obvious choice is to borrow money! At the time of borrowing most of us just sign on the dotted lines immediately after considering only the interest rate and the date of the EMI as determined by the lender.

But every borrower should go beyond this basic check list and find out if any of the different flexible repayment options would suit his needs. But why should you do this in the first place? And what are the types of flexible repayment options available today? Let's find out.

Importance of flexible repayment options

To begin with why do you need flexible repayment options? The biggest advantage is that choosing the right flexible repayment option would reduce your EMI load. Moreover, it could help you avoid getting that adverse 'defaulter' tag. Remember, even a single default could deface your credit report and disqualify you from getting loans in the future.

Now let us see the different repayment options!

Accelerated repayment
As the name implies, choosing this type of flexible repayment option would mean that whenever you get a surplus amount or your income scales up say you get an increment or bonus this option would allow you to increase your EMIs.

This could help you speed up the settlement process as your payment is apportioned against the outstanding principal amount. Increasing your EMIs could help you preclude additional payment in the form of interest on the loan taken.

Step-up loans
This is best suited for someone who is on his or her first job. Market conditions are such that it is obvious for a fresher to start on a low salary, which would increase as he gathers work experience. A step-up loan flexible repayment option synchronises with this growth pattern.

In this type your EMIs will be on the lower side during the initial stages and gradually increases as you gain work experience in terms of number of years.

Moreover, opting for this type of loan could get you higher loan amount as the lender may consider your career growth options as a reliable factor in deciding the loan amount.

Step-down loans
You guessed it right! A step-down loan repayment option is quite the opposite of a step-up loan. The step-down loan repayment option is for someone who is close to his retirement years. This would mean that the person opting for this type of loan repayment option would be drawing a higher salary but this could climb down steeply after his retirement.

In a step-down loan, the EMIs start on the higher side in tune with the higher salary earned by the person and gradually drop in line with the post-retirement income of the borrower.

Balloon repayment
This type of loan repayment option is perhaps a bit different from a step-up loan! A balloon repayment takes its name and repayment structure from the shape of a balloon that swells at the top. Just like a step-up loan, a borrower choosing the balloon loan repayment option would pay lower EMIs in the beginning years of the loan tenure.

However, the similarity ends there. As we move into the loan tenure the borrower would be required to pay more than one-third of the loan amount during the last instalments.

How to choose the appropriate loan repayment option

Well, it all depends on your actual requirements, your income pattern and your stage in life. The bottom line is never to borrow money unless you absolutely need it! And if you are forced to do it, borrow money only after taking into consideration the above there factors.

It would help you determine the right flexible loan repayment option that could help you borrow more even while managing your EMIs in a convenient fashion.

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