• Advantages of Prepayment and Part-payment

    Taking a personal loan is not that difficult these days. You can either apply in the comfort of your home or walk in to a bank, fill in a form, and submit it with minimal documentation. However, the actual challenge starts during repayments.

    You have to pay a specific interest on your loan every month, which might get a bit tiring (financially). During such instances, you can choose to foreclose the loan by paying the outstanding amount in full or make a part-payment towards the outstanding principal amount. So, is it okay to prepay or partially pay the loan amount? Let’s delve a bit deeper.

    Benefits of Personal Loan Prepayment

    Most banks let you prepay the outstanding amount after one year. If you choose to repay the loan amount in full, you will save a lot on the interest. Here’s an example on how you will benefit:

    Suppose you have taken a loan of Rs.3 lakh at an interest rate of 15% p.a. for a period of 5 years. Assuming that the processing fee is 2%, after calculation, your equated monthly instalment (EMI) will come up to Rs.7,137. That way, by the end of the first year, you will be paying Rs.35,529 as interest. If you decide to prepay the outstanding amount of Rs.2,64,160 now, you will be saving Rs.57,049 as interest.

    However, some banks may impose a penalty fee for loan foreclosure. The fee is charged on the outstanding amount and usually ranges between 2% and 5%.

    To calculate how much the loan is costing you and how much you can save by making prepayments, you can use an online personal loan EMI calculator. All you need to do is enter all the loan details, including the tenure, amount, interest rate, processing fee (if any), how you wish to make the prepayment, and foreclosure charges (if any).

    You may have heard that the Reserve Bank of India (RBI) has directed banks not to impose any penalty fee on pre-closure. However, that’s applicable only for floating-rate loans. So, if you are opting for full repayment, make sure you know the foreclosure charges that you may have to pay.

    Benefits of Personal Loan Part-payment

    Paying a hefty amount as interest every year till the tenure ends can get a bit taxing at times, especially if you have chosen a long tenure. This is because loan tenures result in higher interest payments even if the interest rate is lower when compared to short tenures.

    In order to bring the interest down, you can make part-payments toward the outstanding amount. Once you make a part-payment, you can either choose to maintain the same tenure and reduce your EMIs or maintain the same EMI and shorten your loan tenure to clear the loan faster.

    However, note that part-payments only work when you pay a lump sum amount. Moreover, if there are prepayment charges, paying a small amount will have negligible effect on your EMIs. Also, some banks don’t allow part-payments. So, make sure you know the foreclosure rules and regulations before you apply for a loan.

    How to Apply for Loan Foreclosure

    Here are a few steps through which you can pre-close your loan account:

    • Contact your bank branch where you have your loan account.
    • Visit the branch with all the required documents.
    • Meet the relationship manager and say that you want to foreclose your loan account.
    • The personal loan officer will calculate and show you the outstanding amount along with the penalty fee (if the lender imposes one) that you have to pay.
    • The financial institution will process your request once they receive your payment.

    The Effect on your Credit Score

    Any part-payment done against your loan will have negligible effect on your credit score. It will reduce your overall debt, helping you clear your loan on time. However, full prepayments can leave a positive impact on your score in the long run. That’s because, you have successfully paid the loan amount before the stipulated time.

    Everything in a Nutshell

    • Personal loan pre-closure can save you on the interest payments.
    • Part-payments can bring down the outstanding amount, thereby lowering the interest paid on your loan.
    • Full prepayment will boost your credit score.
    • Loan pre-closures don’t have a negative impact on your credit score.
    • Part-prepayments only work when you pay in lump sum.
    • Banks usually have a year as a lock-in period within which you cannot close your loan account.

    Closing your loan account will release the burden of debt from your shoulders. However, make sure that you do the calculations beforehand to see if you are actually benefiting from closing your loan early. If the prepayment charges cancel out your interest savings, then making a prepayment might not be beneficial.

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