Today we all have plenty of need but limited resources so most of the time people take loan to fulfill there needs. Once we take loan, the term Loan Repayment comes into picture, loan repayment means paying the money back to the organization from where we took loan. There are different ways to repay loan amount back, Fortnightly and Monthly loan repayment are two of the ways for making loan repayment. Fortnightly means fourteen days, or two weeks whereas monthly means a calendar month.
When we talk about Fortnightly or Monthly loan repayment, these are the most popular ways of making loan repayment. As the name suggest in Fortnightly loan repayment, the repayment schedule is of two week duration whereas in Monthly repayment which is also called as Equal monthly installment (EMI) offers one month duration. This frequency of repayment schedule directly impacts the interest payment and loan terms which imparts both of these terms from each other.
When you borrow money from a bank or a financial institution, they apply interest rate on the borrowed money depending on certain factors like purpose of loan, amount of loan, loan terms and risk factor. Here purpose of loan can be anything, car loan, home loan, personal loan etc. depending on the type of loan other factors varies. Say for an instance, if you borrow home loan from a bank, naturally the amount will be few lakhs rupees for a period of 10 to 20 years. In such a case bank applies reducible interest rate on your borrowing. which means the interest will be calculated on the balance of the loan amount you owe the bank. So if you make your payments fortnightly it will automatically shorten the repayment schedule. This way the the interest you have to pay will reduce and thus at the same rate of repayment you can settle the loan faster than planned or in other way you can reduce the installment amount.
Monthly Loan Repayment
Monthly Loan Repayment is one of the pay to repay your loan amount back to the bank. Lets have small Home Loan example to understand the impact of monthly loan repayment on the interest payment.
Lets say you have taken a Home Loan of 20 Lakhs at a reducible interest rate of 10% per annum for a period of 10 years from a bank. Now under monthly loan repayment scheme you have to pay back the bank by equal monthly installments. Banks have charts or on- line tools to calculate the monthly installments. For the home loan we have taken in this example, the fixed monthly repayments will be roughly Rs 26,430.
With reducible interest, the interest for that month is added to the outstanding balance and then the fixed monthly repayment is deducted. The balance will be taken for the next interest calculation. As the balance reduces, the interest added also reduces and the debt is cleared at a faster rate.
Interest rate = 10% or 0.1 p.a , so monthly interest rate will be 0.1/12
At the end of Ist month,
Outstanding balance = (Principal) 20,00,000 + (Interest) 20,00,000(0.1/12) = 20,16,677
Amount owing to the bank after first month = 20,16,677– 26,430= 19,90,247
At the end of IInd month,
Outstanding balance = 19,90,247 + 19,90,247 (0.1/12) = 20,06,832
Amount owing to the bank after second month = 20,06,832 – 26,430 = 19,80,402
At the end of IIIrd month,
Outstanding balance = 19,80,402 + 19,80,402(0.1/12) = 19,96,905
Amount owing to the bank after third month = 19,96,905– 26,430 = 19,70,475
So if you see here the interest you have to pay is continuously reducing. On every EMI payment, you pay a fixed monthly interest payment and part settlement of the principal. As the interest is reducing, your debt is cleared at a faster rate.
Fortnightly Loan Repayment
As we saw in Monthly repayment schedule, we can make 12 payments per annum. Fortnightly loan repayment is dividing your monthly repayment amount equally to make your monthly repayment in every 2 Weeks. If we choose fortnightly loan repayment schedule it will let you pay 13 payments per annum instead of 12 in case of monthly. The next question must be ‘how could this be possible?’ This is because there are 26 fortnights every year which is equivalent to 13 months. This extra month every year helps reducing loan amount which will directly helps reducing loan interest. This is how fortnightly payments work.
The repayment frequency can help you save a considerable amount of money. Lets have an example to understand this is detail.The fortnightly repayment for the said loan will be roughly Rs 13,215 (26430/2)
Interest rate = 10% or 0.1 p.a , fortnightly interest rate will be 0.1/26 (52 weeks in a year, so 26 fortnights)
At the end of Ist fortnight,
Outstanding balance = 20,00,000 + 20,00,000(0.1/26) = 20,07,692
Amount owing to the bank after a fortnight = 20,07,692– 13,215 = 19,94,477
At the end of IInd fortnight (first month),
Outstanding balance = 19,94,477 + 19,94,477 (0.1/26) = 20,02,148
Amount owing to the bank after first month = 20,02,148 – 13,215 = 19,88,933
As you can compare the loan balance at the end of first month in both the cases. You can simply find the difference of Rs 1314 reduced loan amount in the case of fortnightly loan repayment schedule at the end of first month which will lead to lesser interest payment in the later months/years. If you go ahead with the calculation in case of fortnightly loan repayment schedule you will find a substantial reduction in the loan term which will directly benefit you monetarily.