Should you make a part payment on your personal loan? Pros, cons, and smart tips

Right from debt consolidation to financing major events in one's life, personal loans provide an easy way of meeting diverse financial requirements. Part payment is also possible while the borrower goes through the repayment cycle. Planning means knowing what a part payment is and its advantages and disadvantages.

What is part payment?

The process of paying a lump sum against the outstanding principal of a personal loan before the contract date is referred to as part payment or partial payment. A part payment reduces the principal balance at one time, as opposed to the monthly payments that pay both principal and interest over time. This reduction can shorten the loan term and decrease the total interest paid over the life of the loan.

How does part payment work?

The excess amount is added to the initial amount due when a borrower pays an instalment. The interest rates are lower because interest on subsequent periods is calculated based on this diminished principal. Borrowers have the option to decrease the EMI while maintaining the initial loan term.

Advantages of part payment

• Interest savings: By reducing the principal, total interest is saved as less interest is accrued over time.
• Improved credit score: An individual's credit score can be increased by demonstrating the ability to repay loans on time, which indicates good financial discipline.

Disadvantages of part payment

• Prepayment charges: Certain lenders may charge fees for premature repayment, also known as prepayment penalties. To determine any associated costs, it is essential to review the loan agreement or consult with the lender.
• Minimum part payment amount: The lender may require a minimum amount for periodic part payments, which can be a percentage of the outstanding principal or a multiple of the EMI.

Steps to make a part payment

1. Consult the lender: Sit down with the lender to review the current outstanding principal, understand the implications of the partial payment on EMI and tenure.
2. Organise funds: Set aside a fund for a partial payment, in addition to saving for other liabilities or emergency funds.
3. Make the payment: Pay the part payment through the payment mode specified by the lender, such as online payments, a cheque, or by visiting the branch office in person.
4. Get confirmation: Once the payment is made, ask the lender in writing to send confirmation with the new loan term, new EMI, and new principal amount.

Role and significance of a certified financial advisor

It becomes vital for borrowers to not only have a discussion with their lender but also sit down with a certified financial advisor and have an honest discussion with them about their financial limitations, current state of affairs, future long-term financial goals, along with other similar aspects, before going ahead with any part payment on their personal loans. With diligent planning, a borrower can ensure that they repay the total loan on time, control the interest applicable on the loan, and ensure that the entire borrowing experience remains pleasant.

In conclusion, the immediate reduction of a loan's principal amount saves borrowers both interest expenses and possibly reduces their debt period. The examination of minimum payment obligations and prepayment penalties, along with individual financial situations, must occur prior to conclusion.

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