To acquire knowledge about the loan capitalization, you have to clear the concept of a loan. Loan is divided into two basic components such as principle and interest which is accrued regularly on the principle loan amount. You must know that loan capitalization is a complex calculation, when the accrued interest and unpaid interest value gets accumulated to the basic loan principle.
What is Capitalization on a Loan
When loan capitalization occurs?
Loan capitalization mostly occurs in the educational loan, where the student does not pay regular interest to the bank until finishes the course study. However, the provision for paying the interest value in the studentship also offered by the worldwide banks. A loan can become capitalized, when the interest gets accrued on the balance principle, during those times when the borrower becomes unable to pay the sum. As the students generally defer payment while studying, the larger interest gets accrued on the basic principle and become complex before the student actually starts paying the monthly installments.
What is the impact, then?
Loan capitalization imposes pressure on the borrower in terms of paying higher repayment value. The new principle becomes higher than the previous amount, as the interest charges and late payment charges also added up with the new value. Hence, being a borrower, you have to pay higher amount of EMI. One more thing you must know that not only EMI, but also the borrower needs to pay additional interest to the lender.
Need examples to understand the scenario?
For instance, being a student you have borrowed a certain sum for which the interest amount is coming $100. Now if you stop paying interest for six months, another $30 will be added to the previous interest value. This amount will be gain added to your principle amount. If you consider 10 year repayment schedule, almost 50% additional payment will have to make clear all the loan amount taken from your lender.
Do you need assistance to reduce the additional interest charges?
If you want to avoid the burden of unpaid interest along with the principal value of the loan, you should pay the value before the loan gets capitalized. The student loan gets capitalized at the end of the grace period, which is generally six months of finishing your school days. Try to pay the interest value while studying in school or during the grace period provided by your lender.
For instance, if you borrow $20,000 at the rate of 6.8%, the monthly interest will become $113. If you try, this amount can be easily managed and paid to the bank. This policy can help you become free from the overburden of the interests and you can complete your education within the additional stress of paying higher loan values. If you can afford this value, you will have to pay only $20,000 you borrowed to complete your career. Then no need to be anxious for the borrowed loan. Start paying a small interest and enjoy a tension free student life.