Getting a personal loan in 2020 is no longer a challenge, and the reason behind that is simple. At present, there are multiple institutions, both financial and NBFCs, which specialize in short term personal loans, thus making it easier than ever before to apply and get approved for a personal loan. Starting from banks like Kotak Mahindra and ICICI all the way to NBFC companies like Money View and Dhani, getting a personal loan today is as easy as filling out an application form online and getting the money in your bank account within 24 hours of approval.
Although the process of availing a personal loan has become easier, there are some aspects of a personal loan that you should be aware of, and one of them includes repayment, specifically prepayment and part-payment, and that is exactly what we will be discussing today.
What Is Prepayment and Part Payment of a Personal Loan?
One of the first and most important things we need to understand is the meaning of the terms prepayment and part payment.
Prepayment is simply fore-closing the loan amount before the final date of payment arrives. For example, suppose you have a loan of ₹50,000, and you have to pay ₹3000 every month as EMI on it. You have paid off ₹6000 along with interest already, and now you have surplus cash with you, with which you want to pay off the remaining balance, which is ₹44,565 . If you pay this amount to the lender instantly, your remaining balance will become zero, and thus you can foreclose the loan.
Similar part payment is simply paying a percentage of the remaining dues at this point in time and the rest at a later date with interest. Taking the earlier example, suppose you pay ₹20,000 today, and thus your remaining balance will be ₹24,565, which you can pay at a later date, thus initiating a part payment transaction.
Features of Prepayment
Now that you understand what exactly prepayment is let us take a look at some of its features.
Become Debt Free
One of the biggest and most important advantages of prepayment is the fact that it reduces your financial burden drastically in one go. Just imagine this situation, earlier you would have been required to pay ₹3000 as EMI every month for the next 14 months to close your loan, but since you already have the amount with you, you can easily pay it off, thus reducing your spendings and managing them better.
Save on Interest
One of the biggest disadvantages of any loan, be it a personal loan or a home loan, is the fact that the longer is the tenure of your loan, the higher the interest amount you will pay on the loan. The reason behind this being, the interest on your loan is calculated annually, and if your tenure is long, the lender is getting the opportunity to charge you a maximum rate of interest for a longer period of time. Along with this, there also lies the fact that when you have a loan with a longer tenure, the risk of default is also high because your financial condition might change, and this is another reason why lenders will charge you a higher amount of interest.
Thus the second advantage of a loan prepayment is that you will save huge amounts of money on your interest amount. The sooner you pay off your loan, the far more money you will save.
Features of Part Payment
Now let us understand the features of part payment of loans. As I explained in an earlier paragraph, you can make part payment of a loan when you have a bulk amount of money with you, but that amount is not equivalent to the principal amount of your loan. Similar to prepayment, part payment will also reduce the overall principal amount of your loan by a significant amount and thus reduce the amount of monthly EMI you will pay.
Reduce Your Debt
The first advantage of part payment of a loan is the reduction of your total debt. Depending on the amount you choose to pay, the principal amount of your loan will be reduced, and thus the overall debt you owe (calculated along with your interest) will be less. Reduced debt will mean that your credit score will increase, and subsequently, your chances of getting approved by lenders will also increase.
Less Interest to Pay
When the principal amount of your loan gets reduced, the lender will calculate the interest amount on the new principal amount, and thus the total interest you are liable to pay will come down. Along with this, since your interest amount will be less, your monthly EMI will also reduce, thus enabling you to budget better and also save more money in the long run.
Disadvantages of Pre and Part Payment of Loans
But not everything about part and prepayment of loans is as merry as they look on the surface. While there are some obvious advantages of undertaking this process, there are some disadvantages to it as well. The most significant disadvantages of these processes are as mentioned below.
Associated Charges
One of the most common disadvantages associated with part and prepayment of loans that most borrowers are unaware of is the charges associated with it. Whenever you approach your lender to pay your remaining dues before the end of tenure, your lender will charge you a significant amount on top of your dues, to recover their losses. The reason behind this is simple. Suppose you have a loan with an outstanding balance of 100,000, and the tenure will end 24 months from now. Your EMI has been calculated, taking into account the interest rate on the loan; but if you approach the lender now and foreclose the loan, it will make the lender lose out on money in the form of the interest you were liable to pay.
Thus in order to recover their losses from your decision of foreclosing your loan, the lender will charge you a significant amount on top of your existing debt.
Reducing Your Bank Balance
While we all agree on the fact that if you are financially sound at the moment, foreclosing your existing loan might be the best option, but the fact remains that in this process, you will reduce your bank balance significantly. If you don’t foreclose the loan, this money will still be with you, and you can further use the money for some other need. And thus, the risk of having a temporary shortage of cash is always there when you decide to foreclose your loan.
Conclusion: Should You Foreclose Your Loan?
The decision whether you should foreclose your loan or not completely lies with you. If you have a bulk amount of money lying in your bank account and you are ready to bore the additional charges associated with prepayment and part payment of your loan, then go ahead with it, but make a note of the disadvantages as well.
Ultimately, you are the right one to decide on the matter. All the best.
