Opt for Personal Loan Prepayment and Partial Payment for Shorter Loan Tenure and Lower EMIs

A medical emergency at home, debt consolidation, urgent home or office renovation, need to buy work-from-home furniture immediately—but not enough funds? When the needs are endless and funds are limited, a personal loan can help. Besides being an unsecured loan, financial institutions demand no explanation on how you intend to use a personal loan. Plus, with a good credit score, you can get an instant personal loan. However, financial institutions charge a higher personal loan rate of interest due to the risk involved in disbursing funds without collateral. This means higher EMIs as compared to other secured forms of loans. But you can mitigate your EMIs by prepaying the personal loan fully or partially.

Under prepayment, financial institutions allow you to repay a loan before the tenure ends. Prepaying a personal loan can help you repay the loan early with lower EMIs and substantial savings per month. However, before exploring prepayment options, it is important to understand the basics of the personal loan prepayment process and the differences between full and partial payments.

Also Read: How Personal Loans Help During An Emergency
 

Prepayment vs. Partial Payment

From the date of the first EMI, you can repay a personal loan between one and five years. The prepayment process allows you to repay the borrowed amount earlier than the stipulated time and close the personal loan. When you have surplus cash at your disposal, you can pay a chunk in advance so that the outstanding principal is paid off either completely (full prepayment) or an amount not less than three EMIs put together (partial prepayment). This reduces the amount of future EMIs.

Full prepayment means repaying the outstanding loan fully. Partial payment is like making the down payment while purchasing a car against EMI. It allows you to repay a certain portion of the principal. The personal loan rate of interest reduces automatically with the principal amount, thus reducing the EMI. The more you prepay, the less EMI you pay. Prepayment and partial payment also reduce the personal loan tenure, which means you can save long-term and even invest the saved amount. You can use an online personal loan interest rates calculator to calculate how prepayment and partial payment might impact the interest rate paid by you.

For better understanding, consider this. You have taken a personal loan worth Rs 2 lakh for a two-year tenure. You must pay a monthly EMI of Rs 9,603. However, part payment of Rs 40,000 would leave you with an EMI of Rs 7,682 for the same tenure (two years). Another option is to continue paying the same EMI but for a reduced tenure of 19 months instead of two years.
 
Also Read: Availing Personal Loans Just Became Super Easy with Digital Lending

Prepayment and Partial Payment Eligibility Check

Most financial institutions allow prepayment and partial payments only after a minimum lock-in period of one year or lock-in amount of at least 12 EMIs. Many financial institutions also restrict the number of times you can prepay. Check all rates, clauses and charges before signing the personal loan contract.
 

Benefits of Prepayment and Partial Payment

 

1. Getting out of debt early

   Prepayment and partial payment help you get out of debt (personal loan) faster. If you earn a lump sum bonus or make a good deal out of a property sale, go for prepayment or partial payment options after you are past the lock-in period. Despite nominal prepayment charges, you will still save money per month by paying either less EMI or saving money long-term by paying the same EMI over shorter tenure. You can utilise the saved money for meeting personal expenses or invest it to reap double benefits from such options.
    

2. Concessions/rewards

   You may be rewarded for prepaying or partially paying your personal loan. Many financial institutions offer value-added services such as a zero-balance savings account or a free trading account if you choose prepayment or partial payment.
    

3. Improving credit score

   Prepayment and partial payment can improve your credit score and you can utilise the improved credit score to avail higher amounts of loans such as home loans, loans against property, business loans etc. that call for stringent background checks.
    

Also Read: 6 Foolproof Tips That Can improve Your Personal Loan Application
 

How to Close Personal Loan Early?

Follow the steps detailed below to foreclose your loan or make a partial payment towards your personal loan's outstanding balance.
 

• Inform your lender:

  The first and most important step in personal loan part prepayment is to notify your lender of your intentions to make foreclosure or part payment of the personal loan. To initiate your prepayment request, you will need to draft an application and fill out the relevant foreclosure form. Specify details such as your loan account number, the reason for foreclosure, and your personal information.
   

• Pay the outstanding dues:

  Once you submit your foreclosure application, the lender calculates the outstanding loan amount. They also consider the interest component, as well as the foreclosure fee, to arrive at the final payment amount. The lender will inform you of the amount after it has been determined. The payments must be made after that.

 

• Request for no dues certificate:

  Once the payments have been made, request your lender to provide you with a no dues certificate. Sometimes the certificate is also referred to as a NOC. The certificate details your dues clearance. It also includes your personal information. 

 

• Check your credit report:

  Once you receive the certificate, check your credit report on the credit bureau website. Make sure that the lender has sent the loan closure report to the credit bureau. The failure to submit a loan foreclosure report will result in a drop in your credit score.

 

Personal Loan Repayment Schedule

You can use a personal loan pre-closure calculator to calculate how your repayment schedule can change if you choose to prepay or partially pay the personal loan. The repayment schedule will give you monthly and annual breakups so that you know how soon you can close your personal loan if you prepay.
 

When is it ideal to foreclose your personal loan? 

Choosing to prepay your loan is regarded as a prudent move in the following circumstances. However, before making a personal loan partial payment, use a personal loan interest rate calculator to decide if the foreclosure is within your budget. 
 

• Prepaying your personal loan is a smart strategy if you expect windfall returns or a large payment at the maturity of your investment.

 

• Prepaying through debt consolidation is a smart choice if you had a high-interest personal loan a few years ago, but now your credit profile qualifies you for a low-interest loan.

 

• If you expect your income to be unstable in the future, consider prepaying your personal loan.

 
Prepayment and partial payment do not come for free. Financial institutions levy charges on prepayment and partial payment because repayment of a loan means a lesser interest amount for them. Most financial institutions impose prepayment penalties and foreclosure charges from 1% to 5% of the outstanding principal. While most financial institutions impose flat prepayment charges, some may levy prepayment charges at various rates depending on the loan tenure left. However, do not choose packages that promise low prepayment charges. Compare the personal loan rate of interest with the prepayment fees and the potential amount you would save with the prepayment or partial payment cost. Use personal loan prepayment calculators available with various financial institutions to check the impact of prepayment on your financial goals.
 
Disclaimer: This post was first published on 2 March 2021 and has been updated for the latest information, freshness and accuracy.