Here’s what was asked and answered by Capital Advisor in March, 2011. It’s a loan closure special. If you have a question on managing your personal finances, send me an email and I’ll respond at the earliest. If your question’s beneficial to a wider audience, I’ll publish it in a future edition of “Asked and Answered,” without revealing your personal details.

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Query #1: On closing a personal loan.

I need your advice. Here’s my scenario: Loan Amount: Rs 150,000; Tenure: 48 Months; Interest: 15%; Bank: Axis Bank; Loan Date : 01-May-2009; No repayment charges. Can you please evaluate whether this is the right time to close my personal loan and what could be the amount I should close it for?

You can download my calculations with respect to your situation.

There are 2 sheets:

• One which assumes the Advance EMI model, and

• One which assumes the Arrears EMI model.

If you compare your Loan Amortization Sheet given by the bank with both of the above sheets, you’ll know which model is being used with your personal loan. In either case, you’ve already paid over 65% of the total interest due. Therefore, in my opinion, it doesn’t make sense to close the loan now since you’ve already paid the majority of the interest due to the bank. Whatever EMI you pay now will mostly be towards the principal itself.

But, if your overarching goal is to be debt-free at any cost, then this psychological factor overrides any financial calculations.

Let me know what you decide.

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Query #2: Again, on closing a personal loan.

I have a query related to my personal loan. Let me give a brief history. Loan Amount: Rs 200,000; Tenure: 5-years; Interest Rate: 11%; EMI: Rs 4,400; EMI Paid: 10-months. While availing the loan, I had originally opted for a repayment duration of 2-years. But an Executive at the Bank suggested that I opt for a repayment duration of 5-years since that option doesn’t have loan preclosure charges or penalties. Now I want to close my loan and before going to the Bank I want to do some homework and be prepared with some figures in my mind. Could you please help?

The Bank asked you to opt for a longer duration simply because they can make more money off you in the form of interest charges. The Bank also recovers a major portion of the interest due early into the tenure of the loan (in the calculations that you can download below you can see that the Bank has recovered almost 30% of the interest due in the first 10-months of a 60-month loan!).

Download my calculations with respect to your situation.

Again, there are 2 sheets:

• One which assumes the Advance EMI model, and

• One which assumes the Arrears EMI model.

If you compare your Loan Amortization Sheet given by the bank with both of the above sheets, you’ll know which model is being used with your personal loan. Either way, you’ve paid about 26% – 28% of the total interest due. Therefore, in my opinion, it does make sense to close the loan now since you haven’t paid the majority of the interest due to the bank.

Let me know if you have any questions.

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Query #3: On closing a home loan.

I have taken home loan for Rs 1,870,000 from SBI for 15 years tenure @ 10.75% interest per annum. I started paying the EMI from January, 2008. I am planning to pre-close my loan before December, 2012. Is it good idea to pre-close within half the tenure? Please advice.

Download my calculations with respect to your situation — this one’s different from the earlier two and is simpler to understand.

By December, 2012, you’d have paid around 48% of the total interest payment due. But since it’s a home loan and since the remaining 52% represents a huge chunk of money, it’d be a good idea to go ahead and pre-close the loan.

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Again, if you have a question on managing your personal finances, send me an email and I’ll respond at the earliest. If your question’s beneficial to a wider audience, I’ll publish it in a future edition of “Asked and Answered,” without revealing your personal details.