Accelerate Your Financial Freedom: A Guide on Personal Loan Part Payments
Personal loan part payment refers to making a partial repayment of a personal loan before its scheduled maturity date. So, for instance, if you have a personal loan that is due in 5 years from today but you save enough to pay half of the loan at the 2-year mark, you have the option to make a part payment.
Personal loan part payment involves making an extra payment towards your loan principal, which is the original borrowed amount. However, when you make a personal loan part payment, a portion of the payment will typically go towards both the principal amount and the interest that has accrued up to that point.
Personal Part Payment Calculation
Let us assume you have taken a loan of ₹10,00,000 and plan to pay a yearly EMI of ₹2,00,000 (₹ 16,666/month) every year till the loan is paid off. In the third year, you have extra savings that you can use to prepay the loan amount partially. Here’s how the calculation would go:
| Year | Opening Principal | Annual Interest | Yearly Payment | Part Payment | New Principal | Interest for Next Year |
|---|---|---|---|---|---|---|
|
1 |
₹10,00,000 |
₹10,00,000 |
₹2,00,000 |
– |
₹9,00,000 |
₹90,000 |
|
2 |
₹9,00,000 |
₹90,000 |
₹2,00,000 |
– |
₹8,90,000 |
₹89,000 |
|
3 |
₹8,90,000 |
₹89,000 |
₹2,00,000 |
₹1,79,000 |
₹6,00,000 |
₹60,000 |
|
4 |
₹6,00,000 |
₹60,000 |
₹2,00,000 |
– |
₹4,60,000 |
₹46,000 |
Therefore, as the table shows, the part payment of your loan in Year 3 dramatically reduces your principal and interest rate every year. Accordingly, you can pay off the loan much quickly down the line and enjoy lower interest rates.
You can also use part payment calculators to estimate how your part payment will affect your overall loan repayment.
Why Should You Opt for Part Payment?
There are several reasons why part-paying your loan in advance is a good choice. Here are a few of them:
Financial Surplus
If you come into extra funds through a bonus, windfall, or any other source, making a part payment can help reduce your loan burden and save on interest over the loan term.
Interest Savings
When you make a part payment, you reduce the outstanding principal, leading to lower interest payments over the remaining tenure. If you have a high-interest loan, making part payments can significantly reduce the total interest paid.
Loan Tenure Reduction
Part payments can help you pay off your loan earlier than scheduled. If you want to become debt-free sooner, making part payments can help you achieve that goal.
Improved Financial Situation
If your financial situation has improved since you took out the loan, using some of your surplus to make a part payment can be a prudent financial move.
Lower Monthly Payments
Making a part payment can potentially lead to lower monthly instalments, making it easier to manage your cash flow.
Difference Between Part-payment and Loan Pre-closure
If you are a first time loan-borrower, then you may face some confusion between personal loan part payment and pre-closure. Even though similar in conception, the two loan repayment options are different in essence:
| Aspect | Personal Loan Part Payment | Loan Pre-Closure |
|---|---|---|
|
Definition |
Making a partial payment towards the outstanding balance |
Paying off the entire remaining balance early |
|
Payment Timing |
During the loan tenure |
Before the scheduled end of the tenure |
|
Purpose |
Reduces outstanding principal, lowers interest payments |
Clears the entire loan balance early |
|
Impact on Interest |
Lowers interest payments for the remaining tenure |
Eliminates all remaining interest payments |
|
Financial Savings |
Leads to interest savings and potential loan tenure reduction |
Results in significant interest savings |
|
Generally only shortens the loan tenure |
Shortens or concludes the loan tenure |
|
|
Prepayment Penalties |
May or may not involve prepayment penalties or charges |
Often involves prepayment penalties or charges |
Personal Loan Part Payment: Things to Consider Before You Pay
- Prepayment Penalties: Some loans come with prepayment penalties that are designed to compensate the lender for the interest income they would have earned if you had continued paying the interest over the full term. Prepayment penalties can offset the potential benefits of making a part payment. Always check your loan agreement to see if there are any prepayment penalties associated with your loan.
- Part Payment Limits: Some lenders may have restrictions on how often you can make part payments or how much you can pay as a part payment. They might limit the frequency of part payments to protect their interest income and ensure the loan remains profitable for them.
- Notification Period: Lenders often require you to notify them in advance if you intend to make a part payment. This allows them to adjust their records and apply the payment correctly.
- Partial Repayment Charges: In some cases, even if there’s no formal prepayment penalty, the lender might charge a fee for processing and adjusting your loan account due to the part payment.
- Loan Terms and Conditions: Loan agreements contain specific terms and conditions that govern part payments. These terms can include information about how the part payment will be applied (e.g., reducing the principal, adjusting the remaining instalments), any associated charges, and the process you need to follow to make a part payment.
FAQs- Personal Loan Part Payment
The frequency of part payments allowed can vary depending on your loan agreement and the policies of your lender. Some lenders might have restrictions on the number of part payments you can make within a specific time frame.
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