Before we get into details, it’s important to know that when you take a loan, you have to pay back the original amount and the interest over time, usually through EMIs. However, these repayment plans can be flexible, and lenders offer options to help you pay off your loan faster or in different ways.
Part-Payment: This means paying a part of your loan in addition to your regular EMIs.
Prepayment: This is when you pay a big part of your loan before the loan term is over.
Pre-Closure: This means paying off the entire loan amount before the loan term ends.
Part-payment is when you pay extra money on your loan in addition to your regular EMI. This can help lower your monthly payments or shorten the loan time.
Reduction in Loan Tenure: Making part-payments allows you to finish paying your loan sooner.
Lower Interest Costs: Since interest is calculated on the remaining loan amount, part-payments reduce the principal, which lowers the interest you pay.
Flexibility: Part payments give you flexibility, allowing you to pay off smaller amounts instead of a large sum like in pre-payment.
Let's say you took a ₹10 lakh personal loan at 10% interest for 5 years. If, after 2 years, you make a part-payment of ₹1 lakh, your remaining balance will be reduced, and the interest charged will now be on a lesser principal amount, thus saving you money over time.
Charges: Banks charge a fee for part-payments, especially if made during the initial years of the loan.
Loan Terms: Always check the terms in your loan agreement regarding part-payments.
Prepayment means paying a big part of your loan all at once. This helps you reduce the remaining amount and pay off your loan faster.
Significant Interest Savings: Since interest is based on the remaining loan amount, paying off a chunk lowers the principal, which also lowers the interest on your EMI.
Reduced EMIs or Loan Tenure: After making a prepayment, you might be able to lower your monthly payments (EMIs) or shorten the loan period, depending on your lender.
Assume you have a home loan of ₹50 lakhs at 7% interest for 20 years. After 10 years, you decide to make a prepayment of ₹10 lakhs. This will reduce your outstanding principal to ₹30 lakhs, which means you’ll pay less interest going forward, saving you a significant amount of money over the remaining tenure.
Pre-Payment Charges: You will have a prepayment penalty, particularly for fixed-rate loans. Floating-rate loans do not attract prepayment penalties.
Financial Stability: While prepaying can save you money, ensure that you maintain enough funds for emergencies and other obligations.
Pre-closure is when you pay off the whole loan amount before the loan period is over. This is also called loan foreclosure.
Debt-Free Life: Paying off your loan early helps you become debt-free faster.
Savings on Interest: You save money by not having to pay interest on the remaining loan.
Improved Credit Score: Paying off your loan early shows lenders you are responsible, which can boost your credit score.
You have a car loan of ₹6 lakhs with a tenure of 5 years. After 3 years, you have accumulated enough savings and decide to pay off the entire outstanding balance. By pre-closing the loan, you save the interest that would have been charged for the remaining two years, thereby saving money.
Pre-Closure Penalty: Just like prepayment, banks will charge a pre-closure penalty.
Lender’s Terms: Some lenders do not allow pre-closure within a certain period (usually the first 6 months to 1 year of the loan term).
| Feature | Part-Payment | Prepayment | Pre-Closure |
|---|---|---|---|
| Definition | Paying a portion of the loan over and above EMIs. | Paying a large chunk of the loan ahead of schedule. | Clearing the entire loan before the tenure ends. |
| Impact on Interest | Reduces interest as the principal is reduced. | Significantly reduces future interest. | Saves on all future interests. |
| Effect on Loan Tenure | Can reduce tenure or EMI, depending on lender terms. | Can reduce tenure or EMI, depending on choice. | Ends loan tenure completely. |
| Penalty/Charges | May have charges, especially in the early years. | Usually involves a prepayment penalty. | May have pre-closure penalties, based on the lender. |
| Best Suited For | Borrowers with irregular extra funds. | Borrowers with a large lump sum for partial repayment. | Borrowers looking to close the loan early entirely. |
Managing loans wisely can help you save money over time. Part-payment, prepayment, and pre-closure are flexible ways to repay your loan and reduce your debt. However, you should think carefully about these options based on your financial situation, the type of loan, and your lender's rules.
By understanding these repayment choices, you can make better decisions and reach financial freedom faster. Always consider possible penalties, your future money needs, and how these choices affect your financial goals before taking action.
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Part-payment is paying an extra amount over your regular EMIs, while pre-payment refers to paying a large chunk of your loan at once to reduce the outstanding principal.
No, part-payment or prepayment generally does not negatively affect your credit score. In fact, it may show responsible borrowing behavior.
This depends on your lender. Some lenders may not allow pre-closure within the first few months of the loan.
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