C. Part prepayments. The third option is to make lump sum or regular part prepayments of the principal. Here you are going to the root of your problem. If your principal outstanding goes down, so will the interest you have to pay on it, whatever be the rate.
Part prepayments also decrease the tenure and, therefore, the total interest outgo. But first, make sure there is no part prepayment penalty associated with your loan. Be careful, DO NOT increase the EMI - the prepayment amount should be in addition to your EMI.
If you part pay the principal every time you have money in your hands, it will reduce the number of EMIs even at your higher rate of interest (see Regular Prepayment).
Almost all banks and HFCs allow part prepayment. The pay-off can either be done on a monthly basis, or as a lump sum anytime during the year. Banks have their own criteria of allowing part prepayments. For example, the minimum that one can part prepay should be equal to at least one month's instalment.
D. Part prepayment along with switching or refinancing. You can also combine either the switching or repayment options with the prepayment option. For instance, if you find that you have some free cash in hand and your bank or another one is giving new loans at lower rates, then you could part prepay the principal to bring down the principal outstanding and the interest outgo.
After that, if you switch or refinance your loan, with a lower outstanding principal, you can bring down your EMI further. If you do combine, then make sure you make the prepayment first, since the switching and refinance options will calculate the cost of doing so on the reduced outstanding principal.
If you have enough cash to fully pay off your loan, you will have to pay a penalty of around 2 per cent on the outstanding loan. To avoid the penalty, you may pay off the entire loan, except one year's outstanding that you have to continue paying as EMIs.
Image: A passenger waits at a bus stop adorned with a bank advertisment offering loans | Photograph: Manpreet Romana/AFP/Getty Images
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