AVOID WRONG DECISION - Invest Or Repay Loan India in 2022

Summary

This 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

• 💰 Paying off a loan early can save you a significant amount of money in interest payments.
• 📊 The majority of EMI payments in the initial years of a loan go towards interest rather than the principal amount.
• 📈 Making prepayments can reduce the overall interest paid and shorten the loan tenure.
• 💡 If you receive a salary increment, bonus, or side income, it's a good opportunity to make prepayments.
• 🤔 Investing the amount of prepayment at a higher rate than the loan interest rate needs to be considered for financial benefit.
• 🏠 The script uses a home loan EMI calculator to illustrate the financial impact of different loan repayment strategies.
• 💼 The presenter offers a LinkedIn growth course as an incentive for viewers to participate in the comments section.
• 📉 The comparison between investing prepayment funds and paying off the loan shows a break-even point at around 11% return on investment.
• 🔢 Detailed calculations in the script demonstrate how much money can be saved by making additional prepayments of varying amounts.
• 📚 The script emphasizes the importance of understanding the core concept of loan repayment and the financial benefits of prepayment.
• ⏳ 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

00:00

💰 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.

05:01

📈 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.

10:02

🏠 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.

15:03

🌟 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.

Keywords

💡EMI

EMI stands for Equated Monthly Installment. It is a fixed payment amount made by a borrower to a lender at a specified date each calendar month. The video explains that when taking a loan, the EMI includes both the interest and principal repayment amounts. The concept is crucial in understanding how loan repayments are structured, and the video highlights that the initial years of paying EMI primarily cover the interest portion.

💡Prepayment

Prepayment refers to the act of paying off a portion of the loan principal before it is due. The video emphasizes that making prepayments can significantly reduce the total interest paid over the life of the loan. It illustrates this with an example where a borrower pays an additional amount each year, resulting in substantial savings and a shorter loan tenure.

💡Interest Rate

The interest rate is the percentage charged on the principal amount of a loan. In the video, it is noted that loans with higher interest rates result in higher overall costs. The speaker discusses scenarios with different interest rates and how they impact the decision to prepay loans versus investing the money elsewhere.

💡Principal

The principal is the original sum of money borrowed in a loan. The video explains that loan repayments consist of paying back both the principal and the interest. In the context of loan amortization, the proportion of the EMI dedicated to the principal increases over time, while the interest portion decreases.

💡Loan Tenure

Loan tenure refers to the length of time a borrower agrees to repay a loan. The video discusses how making prepayments can reduce the loan tenure, thereby saving money on interest payments. For example, a 20-year loan can be shortened to 14 years with regular prepayments.

💡Investment

Investment in the context of the video refers to placing money in financial instruments like mutual funds, stocks, or fixed deposits to generate returns. The speaker compares the potential returns from investments with the savings from loan prepayments to determine the better financial strategy.

💡Mutual Funds

Mutual funds are investment vehicles that pool money from many investors to purchase securities. The video suggests investing in mutual funds as an alternative to prepaying a loan, depending on the potential return rate. The discussion includes the idea that mutual funds may offer returns higher than the interest rate on a loan.

💡Fixed Deposit

A fixed deposit is a financial instrument provided by banks which offers investors a higher interest rate than a regular savings account, until the given maturity date. The video uses fixed deposits as a comparative investment option when discussing whether to prepay a loan or invest the money.

💡Break-Even Point

The break-even point in the video refers to the rate of return at which the benefits of investing money are equal to the savings from prepaying a loan. The speaker calculates this rate to help viewers decide whether to use extra funds for prepayments or investments.

💡Amortization

Amortization is the process of gradually paying off a debt over time through regular payments. The video explains that in the initial years of a loan, a larger portion of the EMI goes towards interest. Over time, more of the payment goes towards reducing the principal, which is a critical aspect in understanding the impact of prepayments.

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