Personal loans have gotten great popularity among middle-class people in the last few decades. The reason behind this is the numerous advantages which this loan offers.
- unsecured nature
- Wide availability
- Low-interest rate
- Flexible repayment tenure
- Minimal eligibility criteria
- Online processing
- No end-use restriction
All these are some of the facilities offered by personal loans.
Personal loans come unsecured which makes it most affordable as you do not need to bank it up by any of your assets. Secondly, it comes with no end-use restrictions which makes it ideal to use for any of your personal or business requirements. An individual can opt for a personal loan as per his/her repayment to tide-over monetary crises. This includes many reasons of any kind such as paying medical bills, debt consolidation, bearing marriage expenses, funding a vacation, and so on. Another advantage of a personal loan which makes it user-friendly is the option of prepayment and part-payment.
Why part-payment/pre-payment?
A personal loan is normally availed when a person is in a temporary cash crunch. Once the purpose for which the loan is taken is completed, most of them want this to get rid of the debt as soon as possible. And a Personal loan allows its customers to pay it before the pre-fixed tenure. There are two ways how a prepayment of a personal loan can be done-
i) Full Prepayment
ii) Part Payment
Full Prepayment
The term full pre-payment means paying the total outstanding amount of the loan. Doing this not only helps one to become debt-free early but also reduces much of the mental stress.
A full pre-payment on the other hand saves a lot of money which would have been paid on the interest.
A borrower can earn maximum profit by prepaying the loan sooner. However, some lenders have a lock-in period for the personal loan full prepayment. The lock-in period for a personal loan with most of the banks is 12 months. So, you are not allowed to close your loan in the first year, if done you will be charged with pre-closure fines. Serving the lock-in period is mandatory for all borrowers. This makes the lender earn the minimum profit by lending. Once the lock-in period is over, one can easily opt for a full prepayment if his/ her finance allows.
Understanding prepayment
Let’s say Naren takes a personal loan of 4 lakhs for the tenure of 3 years at an interest rate of 14%. The EMI of the same is ₹ 13,671. By the end of the tenure, the total outgo of the loan will be ₹ 4, 92,158 within which the amount paid towards interest will be ₹92,158.
| Year | Principal | Interest | Percentage of Total Interest Cost | Interest Saving |
| 1 | 1,15,263 | 48,790 | 52.94% | Lock-in period |
| 2 | 1,32,476 | 31,576 | 34.26% | 47% |
| 3 | 1,52,261 | 11,792 | 12.80% | 12.80% |
This means 50% of the interest is taken by the lender during the first year of the tenure. So if a person does a prepayment soon after he is out of the lock-in period then he would save almost half of the interest payable. The same savings which can be done with a pre-pay will be decreased with each EMI paid.
The total saving on prepayment of a personal loan also depends on one more factor which is called a prepayment penalty. A prepayment penalty is charged by the lender in case of pre-closure of the loan. Different lenders have different pre-closure charges.
Part-Payment
Part-payment of a loan is when a borrower makes a partial payment towards the borrowed loan.
A partial payment brings the outstanding principal amount down hence the interest payable gets reduced. A full repayment needs a huge amount of money at a time but a partial payment can be done even with small savings above your emails. If your finance doesn’t allow you for full prepayment you can surely try part-payment to reduce your debt burden.
Understanding part payment
After the completion of the lock-in period, the borrower has already paid ₹ 1, 15,263. Hence, his outstanding amount is ₹ 2, 87,737. So if a person pays ₹ 1, 00,000 his outstanding principal amount will come down to ₹ 1,87,737. The interest on a personal loan is built on the outstanding principal amount. A reduced principal amount will make you save on interest payments.
There are again some terms and conditions for part payment. The first condition is being out of the lock-in period. Some of the lenders keep a specific number of part payments whereas some allow it to do as many as times the borrower wants. The third condition of a part payment is the amount. Some lenders allow a particular percentage of the outstanding principal amount to be paid as part payment.
To Conclude
Though pre-payments and part payments are helpful, still there are few things to consider before you make your final decision. The real profit by a prepayment should be calculated by considering the given points.
- Outstanding principal amount
- The tenure left
- The pre-closure charges
The prepayment of personal loans can earn you the maximum profit when it is done in the early period of tenure. So while going for a prepayment one must calculate the actual profit which can be earned. If the profit is marginal that it might not be a good idea to spend one’s precious time and effort to make the prepayment.
