When you repay, several components can be outstanding at once. The advantage of a loan against securities is that you can pay the principal back at any point, while only the interest must be paid every month. If the interest is not paid, a penalty is added.
Every repayment is applied in this order:
- Penalty
- Interest
- Shortfall
- Principal
Anything paid over your dues goes towards reducing the principal. The order does not change the total you owe, only what gets cleared first.
Example 1: interest and principal
You have taken a loan of Rs. 1,20,000 at 11% per annum, so the monthly interest is Rs. 1,100. You decide to pay Rs. 20,000.
| Component | Amount (Rs.) |
|---|---|
| 1. Interest | 1,100 |
| 2. Principal | 18,900 |
| Total | 20,000 |
Example 2: with a penalty
Your interest was due on the 7th and you paid 20 days late. The penalty is calculated as Rs. 1,100 x 18% / 365 x 20 = Rs. 10.85. On the same Rs. 20,000 repayment:
| Component | Amount (Rs.) |
|---|---|
| 1. Penalty | 10.85 |
| 2. Interest | 1,100 |
| 3. Principal | 18,889.15 |
| Total | 20,000 |
Example 3: with a shortfall
A shortfall arises when the value of your pledged securities falls and your outstanding loan crosses the permitted loan-to-value limit. The amount by which you have gone over the limit is the shortfall, and it has to be made good.
With the same Rs. 10.85 penalty and Rs. 1,100 interest, plus a shortfall of Rs. 5,000, a Rs. 20,000 repayment is applied as:
| Component | Amount (Rs.) |
|---|---|
| 1. Penalty | 10.85 |
| 2. Interest | 1,100 |
| 3. Shortfall | 5,000 |
| 4. Principal | 13,889.15 |
| Total | 20,000 |