AVOID WRONG DECISION - Invest Or Repay Loan India in 2022
Summary
TLDRThis video script discusses financial strategies for managing loans, focusing on the benefits of prepayment. It explains how making additional payments towards loans can save significant amounts of money in interest and reduce the loan tenure. The presenter compares the savings from prepayment to potential returns from investments, suggesting that prepaying loans is often more beneficial unless higher returns can be guaranteed. The script also emphasizes the psychological benefits of being debt-free and encourages viewers to consider their financial and emotional needs when making decisions about loans.
Takeaways
- đ° Paying off a loan early can save you a significant amount of money in interest payments.
- đ The majority of EMI payments in the initial years of a loan go towards interest rather than the principal amount.
- đ Making prepayments can reduce the overall interest paid and shorten the loan tenure.
- đĄ If you receive a salary increment, bonus, or side income, it's a good opportunity to make prepayments.
- đ€ Investing the amount of prepayment at a higher rate than the loan interest rate needs to be considered for financial benefit.
- đ The script uses a home loan EMI calculator to illustrate the financial impact of different loan repayment strategies.
- đŒ The presenter offers a LinkedIn growth course as an incentive for viewers to participate in the comments section.
- đ The comparison between investing prepayment funds and paying off the loan shows a break-even point at around 11% return on investment.
- đą Detailed calculations in the script demonstrate how much money can be saved by making additional prepayments of varying amounts.
- đ The script emphasizes the importance of understanding the core concept of loan repayment and the financial benefits of prepayment.
- âł The timing of prepayments is crucial, with early prepayments offering the most significant savings and reduced loan duration.
Q & A
How much money can one potentially save by making prepayments on a loan?
-By making prepayments of 13 lakh rupees every year, one can save almost 17 lakh rupees overall in their loan.
What is the significance of the first few years of loan repayment?
-The first few years of loan repayment are significant because the majority of the amount paid goes towards interest rather than the capital, making it an ideal time for prepayments.
What is the impact of additional income sources on loan repayment?
-Additional income sources, such as salary increments, bonuses, or side income, can be used to make extra payments towards the loan, potentially reducing the loan amount and duration.
How does the script suggest using extra money to save on loan repayments?
-The script suggests using extra money to make prepayments on the loan, which can save a significant amount of money and reduce the loan duration.
What is the potential downside of investing the money for a higher return instead of prepaying the loan?
-The downside is that if the return on investment is less than the loan interest rate, it may not be beneficial, and one might end up paying more in the long run.
What is the recommended strategy for loan repayment according to the script?
-The script recommends making prepayments as soon as possible to save money and reduce the loan duration, as it provides a sense of peace and financial freedom.
What is the importance of comparing the loan interest rate with the return on investment?
-Comparing the loan interest rate with the return on investment is crucial to determine whether it's more beneficial to prepay the loan or invest the money elsewhere.
How does the script address the emotional aspect of loan repayment?
-The script acknowledges the emotional benefit of becoming debt-free and suggests that for some people, the peace of mind from settling the loan may outweigh financial calculations.
What is the script's stance on the comparison between renting and owning a house?
-The script poses the question of whether renting or owning a house is better as a topic for discussion among viewers but does not provide a direct answer within the transcript.
How does the script use the example of a 50 lakh rupees loan to illustrate the concept of prepayment?
-The script uses the example of a 50 lakh rupees loan with an 8% interest rate over 20 years to show how making an additional 1 lakh rupees prepayment each year can save a significant amount of money and reduce the loan duration.
What is the script's perspective on the timing of prepayments?
-The script suggests that making prepayments early in the loan term is more beneficial, as it reduces the interest paid and can shorten the loan duration.
Outlines
đ° Saving Money Through Prepayments
The script introduces a video aimed at teaching viewers how to save money on loans through prepayment strategies. It highlights that 50% of India's working population has loans and suggests that understanding loan repayment structures can save thousands. The video promises to reveal two key concepts and poses a question to engage viewers, offering a free LinkedIn growth course to selected participants. The main focus is on how prepayment can reduce the overall interest paid on loans, using a home loan EMI calculator as an example to illustrate how making additional payments can significantly decrease the total amount paid and shorten the loan tenure.
đ The Impact of Prepayment on Loan Savings
This paragraph delves deeper into the financial benefits of prepayment, using various loan scenarios to demonstrate potential savings. It explains that making additional yearly payments can save up to 17 lakh rupees and reduce the loan duration. The script also explores the trade-off between prepayment and investment, comparing the returns from investing the same amount in financial instruments like mutual funds or stocks against the interest saved from prepayment. The conclusion is that unless one can generate a higher return than the loan interest rate, prepayment is a more beneficial strategy.
đ The Pros and Cons of Lump Sum Prepayments
The script discusses the effectiveness of making a lump sum prepayment versus annual prepayments. It uses a graph to visually represent the diminishing returns of prepayment over time and emphasizes the emotional aspect of being debt-free. The video suggests that while prepayment in the early years of a loan is most beneficial, after a certain point, it may be more advantageous to invest the money elsewhere, especially if one can secure a higher return than the loan interest rate. The presenter also shares personal views on the psychological benefits of paying off loans for peace of mind.
đ Personal Perspectives and Conclusion
In the final paragraph, the script wraps up with a personal touch, referencing 'The Psychology of Money' by Morgan Housel, who chose to buy his house without a loan for peace of mind. The video concludes by encouraging viewers to consider their personal financial goals and emotional well-being when deciding between loan prepayment and investment. It ends with a call to action for viewers to like, subscribe, and comment on the video for a chance to win a free LinkedIn growth course.
Mindmap
Keywords
đĄEMI
đĄPrepayment
đĄInterest Rate
đĄPrincipal
đĄLoan Tenure
đĄInvestment
đĄMutual Funds
đĄFixed Deposit
đĄBreak-Even Point
đĄAmortization
Highlights
The video will save you approximately 13 lakh rupees by reducing a 1 crore loan to 87 lakhs.
87.5% of India's working population, about 400 million people, have some form of loan.
The video will teach two important concepts to save money on loans.
A simple question will be asked for a chance to win a free LinkedIn growth course.
A home loan EMI calculator is introduced to explain loan repayment.
Majority of loan repayment in the first few years goes towards interest, not capital.
Making prepayments can significantly reduce the total interest paid on a loan.
An example is given where an additional 1 lakh rupee prepayment annually saves 17 lakh rupees overall.
Investing prepayment money elsewhere must yield more than the loan's interest rate to be beneficial.
A calculator is used to compare the returns of prepayment versus investment.
An 11% return on investment is needed to break even with loan prepayment.
Prepayment reduces loan duration from 20 to 14 years in the given example.
Different loan rates and prepayment scenarios are analyzed in an Excel spreadsheet.
Prepayment is most beneficial when done early in the loan term.
Lump sum prepayments are compared to investing the money for potential returns.
A lump sum prepayment after two years saves 13 lakh rupees and reduces loan duration.
Investing prepayment money must outperform the loan interest rate to be advantageous.
The presenter's personal opinion is to settle loans as soon as possible for peace of mind.
A quote from 'The Psychology of Money' by Morgan Housel emphasizes the peace of being debt-free.
Transcripts
what we will see is that it will save
you 13 lakh rupees roughly okay from one
crore it is coming down to 87 50 percent
of india's working population that is
400 million people have some type of
loan car loan home loan personal loan
wedding loan vacation loan and whatnot
in this video i am going to teach you
two important concepts that may save you
thousands of rupees if you are one of
those 400 million people or plan to take
a loan in future also a big announcement
during this video i am going to ask you
a very very simple question and if you
drop the answer in the comments section
you could be one of the five lucky
winners who's gonna get my linkedin
growth course
absolutely free on that note let's get
this video started for me to teach you
the first concept let me share my screen
with you what do you see on my screen is
a home loan emi calculator okay you can
use it for any loans let us assume that
you have a 50 lakh rupees of loan okay
and the interest rate of that loan is
eight percent and you want to repay it
back in 20 years time okay now what is
likely to happen here is that your emi
is going to be roughly 41 000 rupees and
you are going to end up paying one crore
rupees roughly 50 lakh rupees in capital
that you have taken from the bank or
whoever and 50 lakh rupees roughly in
the interest right now the core concept
of paying back the loan is what we need
to understand so what you will see here
is that the first few years of paying
the loan back to the company or bank
majority of your amount is going to go
towards interest it's not a flat line
you are paying majority of your amount
in the interest not in the capital so
let's just take an example every year
for example you are going to pay five
lakh rupees out of that five lakh rupees
let's say in year 2023 you are paying
roughly three lakh ninety thousand
ninety two thousand rupees in interest
and one lakh rupees in capital next year
the ratio is going to slightly change
you're going to pay slightly more into
capital and less in interest likewise as
you start paying the loan you will see
that interest amounts start dropping and
the capital amount start going up right
this is the core concept now what is
actually happening is in the very first
few years this is where the bank is
making lot of money from you right and
this is the perfect time to make some
prepayments towards your loan right now
let us say that you already have fixed
your emi which is 41 000 rupees but
every year i am hoping that you might
get a salary increment you might get a
bonus you might get a side income by the
way for side income i have created a
separate video where i am making more
than one lakh rupees every month please
go and check the video out because the
moment you make side income you can
settle your loan very very quickly right
now let us talk about if you start to
pay little more money in addition to
your emi every year
what impact it will have on your emis
and what impact it will have into your
overall loan amount and how much of
money you can actually save let us now
come back to the same example and let us
say if in the same example if you start
to pay
every year in addition to your 41 000
rupees that you're paying every month in
addition to that if you start to pay one
lakh rupees every year right so let us
put that one lakh rupees here so let us
say i am going to pay one lakh rupee let
us say you start to pay this from next
year 2023 so let's say 2023 this will
get calculated and you see your amount
here from one crore it drops to 83 lakh
rupees because you made 13 lakhs of
prepayment every year right so by making
this 13 lakh rupees of prepayments
basically every year you are paying 1
lakh rupees you are able to save almost
17 lakh rupees overall in your loan the
bigger question is what if you invested
one lakh rupees every year at a higher
rate than eight percent so let us say
you go and buy mutual funds or you
invest in index funds or you buy stocks
or you buy gold or do whatever right and
you say that rahul i can generate more
than eight percent returns so is it
beneficial to me or not right what we
are going to do is do a simple
calculation here so if i go to this
calculator here and let us say we are
doing a yearly sip of one lakh rupees so
100 000 10 000 1 lakh rupees and let us
say we are doing 13 installments every
year right an expected interest rate or
the return is 8 percent if we calculate
this what you will see is that here you
have invested 13 lakhs and you've got 23
lakhs back you've got only 10 lakh
rupees of profit in this example while
in our case we are able to save roughly
16 to 17 lakh rupees because of the way
home loans or any type of loan works in
which the one lakh rupee that you're
paying every year it is reducing your
interest massively in the beginning
right that's the crux now in order for
us to
break even right what we need to do is
go back and have a look at it and say
okay so at what rate of return i need to
generate to be able to go back to that
same calculation that i did for home
loan right so if i put here 11
right if i put 11 percent you will see
that this 13 lakh rupees now is giving
29 lakh rupees which is roughly 16 lakh
rupees of profit so our conclusion is
that if we are able to generate 11
percent of return on that 13 lakhs
somewhere else then yes you are able to
break even right however there is still
a better advantage or more advantage
for paying the loan which is that your
loan duration in this example will get
reduced from 20 years to only 14 years
now
right so initial loan was 20 years but
by making one lakh payment every year
not only you are able to save almost 17
lakh rupees your loan duration from 20
years to 14 years is getting reduced and
that is the benefit now you might say
raul you are fixing the game here by
putting your numbers that you like right
okay i take that challenge what i have
done is i have done these calculations
for various combinations and what i want
to do is show those calculations back to
you in excel spreadsheet have a look at
this excel spreadsheet here so this is
the first example that we have done just
now where if we do not do any prepayment
right prepayment here is zero you are
going to end up paying one crew rupees
right if you do
basically prepayment of 13 lakhs then
you are paying 83 lakhs so you are
saving roughly 16 lakhs and at 11 you
are able to break even right so you must
be able to generate at least additional
three percent of returns to be able to
break even right let us take another
example let us say what about if your
home loan rate or your type of loan rate
is ten percent rather than eight percent
in fact that is even a worse situation
so if you look at it if you pay
if you have a loan for 50 lakh rupees at
10 percent you will end up paying total
1 15 lakh rupees
if you start doing prepayments the same
amount i have kept just so that we can
compare it 13 lakh rupees every year
you're paying one lakh you will end up
paying 92 lakh rupees that will give you
23 lakh rupees of interest saving that
is more than what we had in the previous
case right now for you to break even in
fact you will have to generate the
returns at 13 somewhere else to be able
to break even with this and the
additional benefit you are getting still
is that your loan is getting paid rather
than 20 years it's shortening to 14
years right so and generating returns
for more than 13
please remember it's not very easy even
the good investors who understands the
stock market who understand the mutual
fund they are not able to generate more
than 15
and they are taking a reasonable risk to
be able to come back to that number
right have a look at another example let
us say that you say rahul i can't really
put one lakh rupees every year in
addition to my emi that will be too much
okay fine fair enough let's have a look
at 50 000 if you do 50 000 every year
hopefully that's not too much at eight
percent rate you will end up moving your
loan duration from 20 to 16 years okay
and you will end up still saving 10 lakh
rupees in interest right and in order
for you to
break even you would need to generate 8
returns elsewhere right so there is not
a massive difference between pre-paying
the loan here versus able to generate
eight percent return right somewhere
else moving on taking another example if
you make prepayments every year fifty
thousand but your loan rate is ten
percent in that case you generally would
have paid 1 crore 15 lakh rupees roughly
but in this example you are going to pay
1 crore roughly and you're going to save
roughly 15 lakh rupees and in order for
you to break even you must be able to
generate 10 returns elsewhere otherwise
you will still be in loss right so in
these four scenarios what have we
learned we have learned that if you can
make prepayments every year continuously
at a good rate right
then you are able to save a lot of money
and you will not be able to generate the
same level of returns elsewhere because
you need to generate more than your loan
rate please remember this right so
anybody who can go ahead and start
prepaying their loan from day one that
is the best strategy from this examples
perspective now you may say to me that
rahul i don't have capacity to pay every
year prepayment in addition to the emis
so is there a better way if i gather
some extra money and if i just do a lump
sum payment is it beneficial to pay or
not right i'm going to clarify that
question with some examples some math
some numbers and some emotions as well
so hold that thought just for a minute
before that let me now announce the
question for today and the question for
today is that do you believe that
renting a house is better or owning a
house is better drop your answers in the
comments and i will pick up the five
best answers and all those five people
are going to get my linkedin growth
course absolutely free let's now move to
the question whether you want to pay
some lump sum amount as prepayment is it
beneficial or not so let us say that you
are able to save five lakh rupees in the
first two years and at the end of the
second year you want to make a lump sum
prepayment into the loan right so let us
do the calculation very quickly it's the
same parameters here 50 lakh rupees of
loan eight percent interest rate 20
years of tenure right we come here and
we want to do one time premium
prepayment only right so let us say 5
lakh rupees so 500 5000 50 000 5 lakh
rupees right and let us say you are
doing it in after two years which is
august 2024 assuming that your loan
started in august 2022 right okay now if
you look at the numbers here what we
will see is that it will save you 13
lakh rupees roughly okay from one crore
it is coming down to 87 lakh rupees and
also if you look at it here your loan
duration is now 16 years right
so you are able to save still 13 lakh
rupees but the question is
if you invested if you invested this 5
lakh rupees in august 2024
right at the end of
2038 which is roughly 14 years so for 14
years if you invest this 5 lakh rupees
somewhere else then what is going to be
the situation right so if i go back here
and compare this right so if i look at
investing that five lakh rupees
at six percent for 14 years you can see
the future value formula here we are
going to get
um 11 lakh rupees so at six percent it
is less but at seven percent you are
going to almost break even right so
remember
your loan rate right now is eight
percent right but if you're able to
generate seven percent return somewhere
else right that is not too hard by the
way you are going to break even with
this loan right if you are able to
generate 10 percent then you will be in
more profits let us look at one or two
more examples if let us say rather than
two years if you have five lakh rupees
after four years of period right what is
likely to be a situation in that
situation the calculations are that you
are still going to save roughly 10 lakh
71 000 rupees right but if you invest
the same five lakh rupees now for
roughly 13 years here okay then what is
likely to happen is if you generate six
percent return then
you are going to break even at six
percent and in fact at eight percent you
are able to generate roughly three lakhs
more so you are you will be in profit so
if you again now take another last
example here that if you go eight years
after eight years of your loan if you
put five lakh rupees at lump sum what is
going to happen situation is very
different here right you're only going
to save seven lakh rupees but still it's
some money good money but if you invest
that money at three percent rate you are
going to break even okay so if you
invest at six percent then which is your
typical fd rate you are actually in
profit rather than paying the loan you
should go and invest that money in fixed
deposit because that's a assured return
that you're going to get and you are
going to be in profit by doing that
right so we are going to conclude a very
important thing and let me take you to
the graph to be able to conclude it so
mathematically what we have done is we
have looked at this graph and said if
you pay lump sum amount in the first two
years great well done it is better than
investing somewhere else if you are able
to then prepay somewhere here it is
almost in the next two years it is
almost you are going to break even at
the same rate of return that you are
going to generate elsewhere after these
years then it doesn't really make much
sense mathematically for you to prepay
your loan because remember this is where
the majority of your money is going to
the bank that is the concept we need to
understand afterwards anyways majority
of this money this side is going to go
into the capital it's not going the
interest right so in this case
actually draw a line here somewhere and
you would say if i need to do prepayment
somewhere here then it is better to
invest somewhere else provided you can
generate almost six to seven or eight
percent return in our examples that we
have taken and if you want to do
prepayment here yes absolutely go ahead
with this so this is all mathematically
what about emotions i'm going to talk
about it and wrap this video up very
quickly in one minute having look at the
numbers here is my final take i
personally believe that as soon as you
can finish your loan nothing like it the
peace you will get the burden that will
get lifted from your mind is not
comparable with any numbers so my
personal opinion recommendation is go
ahead and settle your loan as soon as
possible don't look at any numbers okay
but again you may wish to choose other
part that's absolutely fine i respect
your view and lastly to quote the
psychology of money morgan himself has
quoted page number 217 if you go and
read the second para here he says that
he himself bought his house without any
loan amount because that gives peace to
him that works for him so whatever works
for you if the peace is important for
you please go ahead and pay all your
loan and become debt free i hope you
enjoyed this video and if you did please
give it a thumbs up and subscribe to
this youtube channel
that's how i know you're liking this
content until then stay safe have a good
day signing off
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