What is Part Prepayment in Personal Loan

Part prepayment refers to repayment of a small portion of loan amount by the borrower before the date of loan maturity. Personal loan borrowers can repay a lump sum amount of their personal loan whenever they have surplus funds. This reduces the principal amount which in turn reduces the overall interest cost of the borrower. 

Lenders offer two main options to their personal loan borrowers at the time of part prepayment: EMI reduction or tenure reduction. The borrowers may opt for either of the two depending on their cash flow and financial goals. Lenders also charge a nominal fee from the borrowers at the time of part prepayments. 

Benefits of Personal Loan Part prepayment

Personal loan part prepayment comes with a number of benefits for personal loan borrowers. Few of them are mentioned below:

Reduced Interest Cost

Part-prepayment reduces the principal loan amount of the personal loan. This inturn reduces the overall interest cost of the borrower thereby minimizing the financial burden. Borrowers may use online prepayment calculators to calculate the savings on the interest cost while making part prepayments. 

Reduction in EMI cost and Loan Tenure

Reduction in the outstanding loan amount results in the reduction of the monthly installments thereby increasing EMI affordability of the borrowers. They may also opt for reduction in loan tenure keeping the EMI same throughout the loan term.

Early Closure of Loan

Personal loan part prepayment also leads to early loan closure. Frequent prepayments keep reducing the outstanding loan amount at a faster pace, thereby, closing the loan quickly.

Disadvantages of Personal Part Prepayment

Apart from the advantages, personal loan part prepayment also carries a few drawbacks.

Part prepayment Charges

Lenders levy part prepayment charges on borrowers making partial prepayments on their personal loan. However, these charges are levied only on personal loans offered at fixed interest rates. No part prepayment charges are levied on floating rate personal loans.

Limitations on Part prepayment

For some lenders, borrowers can make only a limited number of part prepayments on personal loans. For instance, HDFC Bank Personal Loan borrowers can part prepay only once in the financial year and twice in the entire loan tenure. The part prepayment can be made only up to 25% of the outstanding principal amount, after paying the first EMI.

Loss of Liquidity

Many borrowers use their emergency funds to make personal loan prepayments. This makes them run short of funds in case of financial exigencies such as medical issues, job loss, etc. Some borrowers also use their investments and savings for making prepayments which again impacts their financial obligations. Therefore, individuals should make prepayments only when they have surplus funds or adequate emergency funds to combat any financial emergency,

Conclusion

Personal loan part-prepayment is an excellent option to repay the loans at a quicker rate. However, the borrowers should consider factors such as financial goals, charges levied by the lenders, etc. to make informed decisions and maintain a balance between repayment management and financial stability.