Understanding Outstanding Loans: What You Need to Know

Loans have become an integral part of our financial landscape, helping us achieve various goals and aspirations. However, it’s essential to grasp the concept of ‘outstanding loans’ to manage your finances effectively. An outstanding loan refers to the remaining balance on a loan that hasn’t been fully repaid yet. It represents the principal amount borrowed along with any accrued interest or fees that are yet to be settled.

In simple terms, an outstanding loan signifies the amount you still owe to the lender, and it’s a crucial factor in understanding your overall financial obligations.

Key Components of Outstanding Loan

Principal Amount: This is the original amount borrowed from the lender, which needs to be repaid.
Accrued Interest: Over the loan tenure, interest accumulates on the outstanding balance. This is the cost of borrowing money and varies based on the interest rate and the loan’s term.
Late Fees or Charges: If you’ve missed payments or haven’t adhered to the loan agreement, additional charges might apply.

How to Estimate Your Outstanding Loan Balance?

Let’s consider a personal loan with the following details:

- Original Loan Amount: Rs. 1,00,000
- Interest Rate: 8% per annum
- Loan Term: 5 years (60 months)
- Monthly Payment: Rs. 5000

Month	Beginning Balance (Rs.)	Interest for the Month (Rs.)	Principal Payment (Rs.)	Total Payment (Rs.)	Ending Balance (Rs.)
1	100,000	667	4,333	5,000	95,667
2	95,667	638	4,362	5,000	91,305
3	91,305	609	4,391	5,000	86,914
...	...	...	...	...	...
57	285	2	4,998	5,000
58

To calculate the outstanding balance at any given month:

Subtract the principal payment from the beginning balance to get the ending balance.
For the next month, the ending balance becomes the new beginning balance.
Repeat these steps for each month until the loan term ends.

In the example table, the outstanding balance gradually decreases as the principal payments reduce the loan amount over time. So, for example, your outstanding balance for the Month 3, after the first two EMIs are paid, is Rs. 86,914.

Keep in mind that this is a simplified example, as real-world loans may have additional factors like varying interest rates, irregular payments, or fees.

How to Effectively Manage Outstanding Loans?

If you are a first-time borrower, it can be difficult to know and monitor your outstanding loan balance. Here are some tips to manage your outstanding loan effortlessly and pay them off without any hitch in the road:

Regular Payments:

The key to managing outstanding loans is making timely and consistent payments. This reduces the principal amount and lowers the interest accrued.

Budgeting:

Include loan payments in your monthly budget to ensure you allocate funds appropriately and avoid missed payments.

Early Repayment:

If financially feasible, consider making extra payments or repaying the loan before the tenure ends. This reduces the interest paid over time.

Consolidation:

In cases of multiple loans, loan consolidation can simplify repayments by combining them into a single monthly payment.

Set Up Auto-Payments:

Consider setting up auto-payments for your loans. This ensures that payments are made on time every month, reducing the risk of missing deadlines.

Make Extra Payments:

Whenever possible, make extra payments towards your loans. Even small additional amounts can significantly reduce the principal balance and the overall interest paid.

Snowball or Avalanche Method:

Choose a debt repayment strategy that works for you. The snowball method involves paying off the smallest debt first, while the avalanche method focuses on tackling the debt with the highest interest rate.

Tracking Outstanding Loans

If you have too many loans or credit cards, things can easily get out of control and keeping an eye on your outstanding debts is crucial. Practice these habits to efficiently track and pay off all your outstanding loans:

Create a Spreadsheet: Use a spreadsheet program like Microsoft Excel or Google Sheets to create a detailed list of your outstanding loans. Create columns for loan type, lender, outstanding balance, interest rate, monthly payment, and due date.
List All Loans: Enter each loan’s information into the spreadsheet. Include personal loans, credit card debts, student loans, mortgages, car loans, and any other loans you have.
Update Regularly: Make it a habit to update your spreadsheet regularly. Whenever you make a payment or receive a loan statement, update the spreadsheet to reflect the current outstanding balance.
Loan Statements: Lenders provide periodic loan statements detailing outstanding balances, payments made, and interest accrued.
Online Portals: Many lenders offer online platforms where borrowers can track their outstanding balances, upcoming payments, and other loan details.
Financial Apps: Various financial management apps, like Money View and BankBazaar, can help you monitor your outstanding loans and payments effectively.

Conclusion

Understanding outstanding loans is a cornerstone of responsible financial management. It empowers you to make informed decisions, stay on top of your financial obligations, and work towards becoming debt-free. By keeping a clear view of your outstanding loan balances, you can pave the way for a more secure and financially stable future.

AMIT ARORA

I am a seasoned retail banker with over 21 years of global experience across business, risk and digital. In my last assignment as Global Head Digital Capabilities, I drove the largest change initiative in the bank to deliver the end-to-end digital program with over US$1 billion in planned investment. Prior to that, as COO for Group Retail Products & Digital, I implemented a risk management framework for retail banking across the group.