Manage Money

Advantages And Disadvantages Of Prepayment And Partpayment

Personal loans have the highest interest rates, apart from credit card interest charges for unpaid amounts. The interest of personal loans ranges from 15% to more than 20% at times. These have a premium interest since these are unsecured loans in nature. 

Unsecured loans are those which do not ask you to give any form of collateral or security or guarantee of payment. Thus, the lender takes a huge risk by giving such loans. To offset this risk, they seek to get as much of their loan amount as soon as possible by exacting a high interest rate. So for instance, if the loan was for Rs. 100000 and the interest rate was 20%, their given amount would come back to them within five months, but if you take more time than that to repay, you’ll end up losing a lot. Even Rs. 20000 interest for a Rs. 100000 loan is a big amount. However, for borrowers looking to get unsecured loans, this is the thing they need to deal with.

A personal loan, a kind of unsecured loan, is very popular in India as it helps to get over temporary financial problems. These are used to finance weddings, buy medical items or get someone treated at a hospital, finance a vacation, buy a home, or anything one wants. Different banks have different charges and fees for such loans. A customer will have some benefits if they pay either partly or by prepaying the loan.

Full prepayment

If you prepay the loan early on in the loan’s tenure, you’ll be saving a lot on interest especially if it is a personal loan. Generally, personal loans have a lock-in period after which one can prepay the whole outstanding amount.

For instance, if your personal loan is of Rs. 2 lakhs and if the interest rate is 15% for a term of 5 years, your monthly EMI comes down to Rs. 4758. You pay Rs. 29039 within the first year towards the premium along with Rs. 28057 as interest. If you decide to prepay the rest of the amount at this time, you’ll be paying Rs. 57422 less in interest!

The real trick is to prepay the whole amount early on in the loan’s tenure. This allows you to enjoy all the benefits of the loan without suffering the disadvantages which high interest brings on. Even if one reaches almost the end of the loan’s tenure and has some excess cash left, one can prepay the rest of the amount. One still saves money that way.

However, some banks do charge a penalty for doing so. The penalty charge is between 3% to 5% of the loan if you want to prepay. Recently, the RBI has told banks to stop charging this penalty for customers who are prepaying loans.

Very often, banks do charge a penalty for prepayment.

However, this directive still applies only to loans that are taken on a “floating interest rate” basis. If the interest rate for your personal loan is fixed, your penalty shall not be taken away. However, some private and public sector banks do not charge this. Thus, if you have idle cash at hand, you can easily prepay the loan at no extra cost. 

Part payment

Part payment of your personal loan is when you have idle money at hand, but either don’t want to prepay the whole loan or cannot. It can also happen that your sum of idle money cannot cover the loan’s total principal. Part payment is a good option as it lowers your unpaid principal amount, which in turn lowers your EMI and interest. However, remember that it helps only when you pay a sizable amount as part payment. Giving part payments is a very good way to save on interest.

Small part payments can help, but not if there are prepayment charges involved. 

The other benefit here is that you can part pay the loan as many times as you can. It can be one big payment or regular smaller ones. These shall bring the principal and interest payable down. 

When it comes to personal loans, most banks don’t allow part payment. Banks and other lenders have a lock-in period.

Effect on your credit score

Part payment has no effect on your credit score. 

Prepayment does have a positive effect on your credit score, but this takes effect through the long term.

 

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