Step-Up Loan
To pursue financial security or your dream, You’re in conflict, right?
Following your dreams is usually easier said than done. Your dreams shouldn’t come at the expense of your savings, retirement, investments, and general finances. You need to be mindful of those, too, in order to succeed. This is where loans come into the picture but in this era of sky-high prices and inflation, most buyers are in a dilemma while opting for any type of loan. Due to this many lenders offer various options to make the repayment of loans easy, flexible and convenient for borrowers. One such option is Step-Up Loans. With Step-up loans you now have the key to fulfill your dreams in an early life without going broke. Let’s dive into the topic and explore more about step-up loans.
WHAT IS A STEP-UP LOAN?
A type of loan, offering varied EMIs (Equated Monthly Installments) spread over the loan’s tenure. During the initial loan tenure, the borrower pays a lower EMI. This makes it easy and affordable for young earners. As the years roll by, the EMI outflow increases. It is assumed that the borrower's salary will increase and hence the EMIs also increase with time.
How does a Step-up loan work?
In simple words, EMI is recovered in pieces/parts. A step-up loan takes into consideration the future earning power of the prospective borrower, which therefore increases his loan eligibility. It is assumed that the borrower will advance in his career, get promotions and earn increments. With increase in income ability to pay the EMI also increases. Hence, the burden of repayment is much more in the later stages. Another fact is that if the borrower gets married, then the EMI may increase based on the fact that now two people would be willing to pay the amount due.
Now let us understand what are the pros and cons of a step-up loan -
PROS-
Increases loan eligibility for the borrower thereby increasing the chances of loan approval.
Suitable for those who have just started their careers due to lower EMI burden in the initial stages
With greater interest rates the tax benefits are also on the higher side.
Reduced cost of borrowing and initial payment burden.
CONS-
It is based on the assumption that the borrower’s salary will increase with time but what if this is not the case. If this does not happen, the borrower might land up in trouble during the later stages when the interest rates are higher.
This type of loan becomes costly as during the initial stages the interest paid is more than principal. The situation will get worse if it is a floating rate loan and the interest rates go up with time.
The bottom Line
One needs to act wisely while opting for step-up loans. Be sensible when evaluating the quantum of future increment. Consider inflation while calculating your expected increment. This will help you predict how much you can pay in the future. It is always advised to do proper research and take professional help if needed so that you can take care of your financial health and manage your finances properly.