What is part payment in a personal loan? Benefits and drawbacks explained

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 principle of a personal loan before the contract date is called 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. This reduction can reduce the term of the loan and decrease the total amount of 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 less because interest on subsequent periods is calculated based on this diminished principal. Borrowers have the choice of decreasing the EMI while maintaining the initial term of the loan.

Advantages of part payment

• Interest savings: By reducing the principal, interest is saved in total as less interest is accrued over time.
• Improved credit score: The credit score of an individual can be increased by demonstrating that one is capable of repaying loans in due time, which shows good financial discipline.

Disadvantages of part payment

• Prepayment charges: The premature repayment may be subject to fees by certain lenders and to find out any costs involved, it is important to go through the loan agreement or speak with the lender.
• Minimum part payment amount: The lenders may require a minimum amount of periodic part instalment payment, which can be some percentage of the outstanding principal or a multiple of the EMI.

Steps to make a part payment

1. Consult lender: Sit down with the lender to check the current outstanding principal, understand the implication of the part payment on EMI and tenure.
2. Organise funds: Have the fund set aside for a part payment in addition and save 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, cheque, or by going to 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.

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 together with individual financial situations must happen prior to concluding.

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