A Strategic Guide to Personal Loan Prepayment and Partial Payment

Meet Rohan. Last year, faced with a sudden medical emergency at home, he needed funds quickly. Because financial institutions demand no explanation on how you intend to use a Personal Loan, he was able to secure the funds instantly. Now, Rohan has received a substantial year-end bonus. With surplus cash sitting in his savings account, he faces a classic financial dilemma: should he invest this money, or should he use it to clear his debt early?

When your needs are endless but your funds are limited, a Personal Loan acts as a reliable financial cushion. Since it is an unsecured loan, lending institutions take on higher risk, which means they generally charge a competitive but higher Personal Loan rate of interest often around 18% per annum. Naturally, this translates to higher EMIs compared to secured borrowing.

If you, like Rohan, find yourself with excess funds and want to reduce your monthly financial burden, you can strategically mitigate your EMIs by prepaying the Personal Loan fully or partially. Let us dive deep into the mechanics of personal loan prepayment and understand exactly what is part payment in loan to help you make an informed decision.

Decoding the Terms: Prepayment vs. Partial Payment

Before making a move, it is crucial to understand the fundamental differences between these two debt-clearance strategies. From the date of your first EMI, you typically have a repayment window between one and five years, but you do not always have to wait for the completion of the tenure.

What is Personal Loan Prepayment?

The prepayment process allows you to repay the borrowed amount earlier than the stipulated time and completely close the Personal Loan. Full prepayment means repaying the outstanding loan fully in one go. Under prepayment, financial institutions allow you to settle the debt and walk away debt-free before your scheduled timeline.

What is Part Payment in Personal Loan?

If you are wondering what is part payment in a personal loan, think of it as making a down payment while purchasing a car against an EMI. When you have surplus cash at your disposal, you can pay a chunk in advance. This allows you to repay a certain portion of the principal amount. Generally, lending institutions require that a partial prepayment is an amount not less than three EMIs put together.

The Financial Impact: How Do They Work?

The math behind early repayment is heavily tied to your principal amount. The Personal Loan rate of interest reduces automatically with the principal amount, thus directly reducing the interest burden. The more you prepay, the less EMI you pay overall.

To put this into perspective, let us look at a practical example:

• Imagine you have taken a Personal Loan worth Rs 2 lakh for a two-year tenure.
• You are currently paying a monthly EMI of Rs 9,603.
• If you make a part payment of Rs 40,000, your principal drops.
• Outcome A (Lower EMI): You can keep the same two-year tenure, but your monthly EMI will drop to Rs 7,682.
• Outcome B (Shorter Tenure): Another option is to continue paying the same EMI of Rs 9,603, but for a reduced tenure of 19 months instead of two years.

You can easily use an online EMI calculator to check how prepayment of personal loan impacts your specific repayment schedule. The schedule will provide monthly and annual breakups so you know exactly how soon you can close your loan.

Crucial Checks Before You Prepay

While the idea of being debt-free is appealing, prepayment and partial payment do not come for free. Financial institutions levy charges because early repayment means a lesser interest amount for them. Keep the following factors in mind:

• Lock-in Period: Most financial institutions allow prepayment and partial payments only after a minimum lock-in period of one year or a lock-in amount of at least 12 EMIs.
• Frequency Limits: Many financial institutions also restrict the number of times you can prepay during your loan tenure.
• Foreclosure Penalties: Most financial institutions impose prepayment penalties and foreclosure charges ranging from 1% to 5% of the outstanding principal. While most impose flat charges, some may levy varying rates depending on the loan tenure left.

Always compare the Personal Loan rate of interest against the prepayment fees to ensure the potential savings outweigh the costs. Ensure you check all rates, clauses, and charges before signing the original contract.

How to Close Personal Loan Early? (Step-by-Step)

If the math works in your favour and you are past the lock-in period, follow these steps to foreclose or make a partial payment towards your outstanding balance:

1. Inform your lender: The first and most important step is to notify your lender of your intentions to make a foreclosure or part payment. To initiate this, you will need to draft an application and fill out the relevant foreclosure form. Specify details such as your loan account number, your personal information, and the reason for foreclosure.
2. Pay the outstanding dues: Once submitted, the lender calculates the outstanding loan amount. They will consider the interest component and the foreclosure fee to arrive at the final payment amount. The lender will inform you of the determined amount, after which the payments must be made.
3. Request for no dues certificate (NOC): Once payments are cleared, request your lender to provide a no dues certificate, often referred to as an NOC. This certificate details your dues clearance and includes your personal information.
4. Check your credit report: After receiving the NOC, check your credit report on the credit bureau website. Make sure the lender has sent the loan closure report to the credit bureau, as failure to do so can result in a drop in your credit score.

When is the Ideal Time to Foreclose?

Choosing to prepay your loan is regarded as a prudent move under specific circumstances:

• Windfall Gains: If you expect windfall returns, earn a lump sum bonus, or make a good deal out of a property sale, prepaying is a smart strategy.
• Debt Consolidation: If you took a high-interest loan years ago but your improved credit profile now qualifies you for a lower rate, prepaying through debt consolidation is a smart choice.
• Income Uncertainty: If you expect your income to be unstable in the future, consider prepaying your Personal Loan while you have the liquidity.

Before executing a personal loan prepayment, always use an online calculator to confirm the foreclosure fits perfectly within your financial goals.

Frequently Asked Questions (FAQs)

What is the difference between prepayment and part payment?

Prepayment (or foreclosure) means paying off the entire outstanding principal to close the loan account completely. Part payment involves paying off a lump sum portion of the principal (usually equal to at least 3 EMIs) to reduce future EMIs or shorten the tenure, while the loan account remains active.

Can I partially pay off my Personal Loan at any time?

 No, most lending institutions require you to complete a lock-in period, which is typically one year or at least 12 EMIs, before you are eligible to make a part payment.

Will part payment affect my CIBIL score?

 Yes, in a positive way. Reducing your outstanding principal lowers your credit utilisation and debt-to-income ratio. Consistent, responsible repayment behaviour helps maintain an ideal CIBIL score of 725+, making future borrowing easier.

Are there any hidden charges for early repayment? 

Lending institutions are transparent about these charges in your loan agreement. Generally, you can expect foreclosure or prepayment charges ranging from 1% to 5% of the outstanding principal amount. Do not simply choose packages that promise low prepayment charges without looking at the overall interest rate.

Disclaimer: The information provided in this blog post is intended for informational purposes only. The content is based on research and opinions available at the time of writing. While we strive to ensure accuracy, we do not claim to be exhaustive or definitive. Readers are advised to independently verify any details mentioned here, such as specifications, features, and availability, before making any decisions. Hero FinCorp does not take responsibility for any discrepancies, inaccuracies, or changes that may occur after the publication of this blog. The choice to rely on the information presented herein is at the reader's discretion, and we recommend consulting official sources and experts for the most up-to-date and accurate information about the featured products.