In this article, we will look at the part pre-payment facility for personal loans, which allows borrowers to make a substantial lump-sum payment to significantly reduce their outstanding loan amount.
It is easy to get a personal loan because it requires minimal documentation and the approval process is quick. But since personal loans are unsecured, they carry a higher rate of interest. If you are in a position to fully or partly pay off the loan, it might make sense to do so, as you could end up saving significantly on the interest cost.
What is Part Pre-Payment of Loan?
Part pre-payment is the practice of making an early payment towards the outstanding loan amount, reducing the overall debt burden. Part pre-payment ideally happens when the borrower has some extra money but does not equal the entire outstanding principal amount. The borrower deposits this amount in the loan account to reduce the unpaid principal amount.
Benefits of Personal Loan Pre-payment
Interest Saving
One of the key benefits of personal loan pre-payment is the potential to save on interest payments. Borrowers can drastically lower the total interest paid over the loan term by making additional principal payments. This can lead to substantial savings, especially in case of long-term loans. By prepaying your personal loan, you can save on interest by reducing the total amount of interest accrued over the loan term.
Early Debt Freedom
The outstanding loan amount decreases by making additional payments, enabling borrowers to clear the debt sooner. By prepaying your personal loan, such as by paying extra monthly, you can potentially pay it off in a shorter period, freeing yourself from debt sooner. This provides a sense of financial freedom and reduces the overall financial burden.
Reduced Monthly Installments
Another advantage of personal loan pre-payment is the possibility of lowering monthly instalments. Borrowers can negotiate with the lender to reduce the subsequent monthly payments by decreasing the principal amount. This can improve cash flow and make it easier to manage finances. For example, if you prepay a portion of your loan, the outstanding balance will decrease, resulting in smaller monthly payments over the remaining term.
Improved Credit Score
Paying off a personal loan earlier through pre-payment demonstrates financial discipline and responsibility. Consistently making early or additional payments on your loan can positively impact your credit score by showcasing your ability to manage debt responsibly. A higher credit score opens doors to better future loan terms and interest rates.
Penalty For Part Pre-Payment
Lenders generate profit from the interest rate that they charge on personal loans during the entire loan tenure. The interest rate and profit increase with the length of the tenure. When a borrower chooses to make an early payment or a part payment, the loan’s outstanding balance decreases, which in turn affects the profit generated by the bank. Therefore, banks charge a percentage of the repaid amount to compensate for the lost profit. The penalty for part pre-payment usually is either a percentage of the amount prepaid or a percentage of the principal amount.
Conclusion
Part pre-payment of a personal loan offers several advantages to borrowers. It provides an opportunity to save on interest payments, become debt-free earlier, and reduce monthly instalments. Additionally, it can improve the borrower’s credit score and offer flexibility in managing loan repayments. However, it is crucial to carefully review the terms and conditions set by the lender to understand any associated charges or conditions.
