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As life changes daily, so do our financial needs and goals. Due to that, we may require something that could boost us financially. A loan for newlyweds who need a home or parents looking to finance their children's education, loans could come in handy.
No doubt, loans are an integral part of our lives since they help us make ends meet when we are stranded. They help provide access to otherwise inaccessible life necessities that can take years when we depend on our own funds alone. Without loans, many dreams would remain out of reach.
A personal loan can provide the necessary funds in a short time, so that in case of an emergency, you at least have somewhere to turn. But taking out a loan is no small endeavour. You should first understand fees, charges, and repayment conditions. Also, borrowers must be aware of any financial implications of making pre-payments, part-payments, and pre-closure of loan.
They should weigh all potential outcomes carefully to ensure no nasty surprises await them before the loan term ends. For instance, part-payments or pre-payments could come with penalties. Therefore, it's vital to learn everything about these loan payment options.
Part-payment of a loan means the borrower has money but is not equal to the remaining principal amount. They use it to pay the principal amount to reduce the overall amount. Therefore, the total monthly installments and interest will reduce.
You can reap benefits from this part-payment plan when you pay a significant lump sum as the part-payment. This means you must set aside a considerable sum to take care of the part payments.
Part-payment of a loan can be a smart move since it reduces the principal amount and thus decreases the interest charged. This means you could potentially lessen your overall EMI burden with just one payment. But you should only consider this option when your funds are in surplus.
If you want to reduce interest, part-payment is the best loan option. The amount you will pay is deducted from the outstanding principal amount through partial payments. However, what you will save will depend on timing and the partial payment amount made. Too small or poorly timed payments could cause more harm than good, especially when the lender charges pre-payment costs.
Paying off your loan doesn't have to be challenging with part-payments. Breaking the loan amount into smaller chunks can make a big difference. Part-payments allow you to pay what you're comfortable with, whether making multiple frequent payments or one lump sum at regular intervals. Doing so can ease the burden of repayment and reduce both your EMI amounts and interest in the long run.
Even if your bank or financial institution charges fees for pre-paying, making large and frequent payments can help you save on interest. However, banks might not allow that on loans like personal loans. There could be a lock-in period for the term and the amount that is allowed to make on the part-payment.
Loan prepayment is a way of paying off your outstanding principal amount in full or part before the end of its tenure. This could help you save a significant amount and be in control of when and how much to pay. For example, most banks allow pre-payment after one year, allowing borrowers to create their own repayment schedule and potentially saving thousands of rupees in interest.
Let's see how pre-payment helps in this example:
Tim borrowed Rs 3 lakh at a 15% annual interest rate for five years. He paid Rs 7,137 as his monthly installment in his first year and Rs 35,529 as interest. The remaining loan amount was Rs. 2,64,160. When Tim decided to prepay the remaining amount, he saved Rs 57,049 in interest.
By choosing the pre-payment option for your loan, you can save on interest and pay off your debt sooner. Besides, you might get a free trading account from your lender if you pre-pay a loan.
Pre-payment is one of the ideal ways to avoid interest. You will find the best way to avoid interest and get out of debt quickly. Plus, banks might even reward you when you pre-pay your loan with deals like free trading accounts.
Some banks may charge a penalty fee of about 3% for closing a loan before its due date. The penalty is calculated based on the remaining principal balance of the loan. An online EMI calculator can help you get a better view of your loan figures. It will provide you with an estimated cost of the loan and help you calculate your savings with the pre-payment facility.
Loan pre-closure is also known as foreclosure. It is basically the repayment of a loan before the end date. It is where you pay off the outstanding principal in one installment before its tenure ends. It's a legal process that can greatly reduce interest. Moreover, it helps close your personal loan account before its repayment period elapses.
Pre-closing is a better option if you want to repay your debt earlier. The lender determines your pre-closure balance after taking into account your total outstanding obligations, interest, and loan term. Once you are satisfied with the calculations and the amount, you may pay it off and close the loan. Normally, a personal loan can have a lock-in period of one year.
After settling the loan, take your certificate and any other documents from your lender. Sometimes the bank or lender may foreclose the loan if the borrower is unable to repay the loan and misses on EMI payments. They will do that by selling the collateral you provided as security. Once the amount is enough to cover the outstanding loan amount, they will officially close your loan account.
You should only consider personal loans in case of an emergency, not to supplement your income. However, if you already have a personal loan and want to save money, consider pre-payment, part-payment, or pre-closure to reduce the interest rates and EMIs.
Before deciding to pre-close, pre-pay, or part-pay your personal loan, do this:
Check with your bank before you choose the loan payment option. Different banks have different rules and regulations. So, knowing their specific guidelines is important. Do not take action until you are sure the option you've chosen is the right one.
If you are lucky and can manage to save the outstanding principal, you could consider foreclosing your loan. On the other hand, if you pre-pay your loan in full, it can result in significant interest savings. Besides, part-payments can lower loan tenure.
If you wish to pre-close your loan, here are the steps:
|How it works||Settling the debt before its due date.||Paying a considerable amount less than the outstanding principal.||Paying outstanding principal in a single installment before the end of tenure.|
|Principal amount||Reduces principal.||Reduces principal.||Principal paid in full.|
|EMI||Reduces EMI||Reduces EMI||No EMI|
|Interest Rate||Reduces||Reduces||No rate|
As a borrower, whether you choose to make a pre-payment, part-payment, or foreclosure of your loan, it will be beneficial as long as you understand your situation. Below are the benefits:
If you have a mountain of debt, the best way to repay it faster is to pre-close it. You can use your extra savings or investments to reduce the debt load. Even paying more than your required EMI can help you become debt-free sooner.
Many believe that a loan with a longer tenure is the best because you have more time to repay it. At a glance, it seems like the best strategy, but not really. You will end up paying more in the long run.
For instance, borrowers with a tenure period of 10–15 years can pay double the principal amount or more in interest. You can avoid this by foreclosing your loan early on. However, weigh the costs and benefits before proceeding.
Pre-closing a loan means you will no longer pay any interest or fees. This means ending your contract with the lender before the loan tenure ends. Part-paying can also lower the tenure. Part-payment helps decrease your EMI amount while keeping the tenure the same, or shorten the tenure while maintaining your current EMI amount. Make the smart move and take control of your finances today.
Paying off a loan early or making additional payments ahead of schedule will not have a negative impact on your credit score. Lenders and credit bureaus view pre-payment and pre-closure as a loan being paid within the set time frame. But if you're trying to build your credit history from scratch, consistently paying your dues on time for a longer period of time will do wonders for your credit score and overall creditworthiness.
Don't be tempted to spend any extra cash on unnecessary items. Rather than splurging unnecessarily, why not use it to repay your debt? This will help you become debt-free sooner and save you from paying much interest.
Even though there are numerous advantages to pre-paying, part-paying, or pre-closing your personal loan, one of the most crucial thing is that it won't affect your credit score. Plus, they minimize your financial strain, making it easier to fully pay off your loan by the predetermined deadline.
Unlike regular payments, all these options won't hurt your credit rating. In fact, pre-paying can actually boost your credit score by closing the loan account early. Now that you know how all these loan payment options work for personal loans, you can choose the best repayment strategy for your financial future.
Q1. If I make part-payment on my loan, will it reduce the EMIs?
Yes. When you make a part-payment, you lower your overall loan amount, and your EMIs automatically adjust to reflect the new balance.
Q2. Is part-payment of a loan with large amounts beneficial?
It is best to partly pay your loan amount in large amounts to reduce your monthly loan payments or shorten the loan tenure. This lets you pay off your loan faster and improve your credit rating.
Q3. Will loan pre-payment or foreclosure affect my score?
Your score remains unaffected by pre-closure of a loan. However, if you are a new or inexperienced borrower trying to build your credit score, it's wise to continue repaying the loan for the full tenure.
You may also read this: Credit Mix and how Does it Affect Credit Score
Pre-payment, part-payment, and pre-closure of loans are the best ways to handle and manage your personal loan. If you opt to use any of the options, you can save big on interest, which is the main cause of loan repayment delays. You have the power to reduce interest rates, shorten the loan repayment period, and use your surplus funds wisely. Investing extra money back into your loan account can lower the EMI or shorten the loan tenure. However, before you decide to pre-pay your loan in full, consider the charges and any pre-payment penalties. Go the fore-closure route if the interest you will save is more than the whole charge. Consider part-payment when you have large amounts of money.