Personal loans usually have a tenure of up to five years. If the personal loan is availed during a financial emergency, the borrower may go for a longer tenure as they may be unsure of the cash flows in the near future. However, while servicing the personal loan EMIs, if you receive a lumpsum, you can use it to make a personal loan partial payment. In this article, we will understand what a personal loan partial payment is, its benefits, and the factors to consider.
What is a personal loan partial payment?
A personal loan partial payment involves an additional payment over and above the regular monthly EMI. For example, Dinesh took a Rs. 1 lakh personal loan for a tenure of 5 years. He pays an EMI of Rs. 2,224. After one year, Dinesh received a bonus of Rs. 25,000 from his employer. He used the bonus amount to make a personal loan partial payment. With the partial payment, Dinesh was able to reduce the outstanding principal on his personal loan by Rs. 25,000.
A personal loan partial payment reduces the outstanding principal by the amount paid. With a partial payment, if the bank keeps the EMI the same, the personal loan tenure will come down. On the other hand, with a partial payment, if the bank keeps the tenure the same, the EMI amount will come down.
After the partial payment, if you are comfortable paying the same EMI amount, you may request the bank to reduce the loan tenure. It will help you finish the personal loan repayment before the scheduled tenure.
However, after the partial payment, if you want to lower the EMI to reduce the pressure on your cash flows, you may ask the bank to do so. A lower EMI will be lighter on your pocket and help pay the remaining EMIs comfortably. In this case, the EMI payments will continue as per the original loan schedule.
Benefits of personal loan partial payment
Some benefits of a personal loan partial payment include the following.
Interest savings
When you make a personal loan partial payment, your outstanding loan amount comes down. So, now you will have to pay interest on the reduced loan principal amount. Thus, your interest outgo will reduce with a partial payment resulting in interest savings.
Lower EMI
After the partial payment of a personal loan, you can request the bank to reduce the EMI amount and keep the loan tenure the same. A lower EMI is more manageable to pay. The amount saved from the reduced EMI can be invested towards financial goals.
Debt becomes manageable
When you make a personal loan partial payment, your loan outstanding principal comes down. Thus, your debt becomes more manageable than before. The higher the partial payment amount, the more manageable the debt becomes.
Loan gets over earlier than scheduled
After making the partial payment, you can ask the bank to keep the EMI the same and reduce the loan tenure. If you do that, your personal loan repayment will get over earlier than scheduled. If this is your only loan, you will become debt-free earlier than expected.
Partial payment fees
Some banks charge a partial payment fee. Check your personal loan agreement or with the bank on such a fee on your personal loan.
For example, as per the HDFC Bank website, the fee for partial payment is as follows:
- Up to 24 EMI – 4% + taxes on the partial payment amount
- Between 24 to 36 EMI – 3% + taxes on the partial payment amount
- Post 36 EMI – 2% + taxes on the partial payment amount
The HDFC Bank website further mentions that partial payment would be allowed post servicing of 1st EMI, up to 25% of the principal outstanding. It will be allowed only once in the financial year, and twice during the entire loan tenure.
The ICICI Bank website mentions a partial payment fee of 3% + taxes on the amount being paid for the loan seasoning period of up to 24 months. The partial payment fee is nil for a loan seasoning period of above 24 months.
The Kotak Bank website mentions partial payment is allowed for loans disbursed after 1st February 2020. Partial payment is allowed post completion of 12 months for up to 20% of the principal outstanding. Partial payment is allowed once a year. The fee per instance of part payment is Rs. 500 + Taxes. Other banks will have their own terms and conditions pertaining to the partial payment fees.
If there is a partial payment fee on your personal loan, check how much it is. Calculate the savings after deducting the partial payment fee from the interest savings. If the savings are meaningful, going for the partial payment may make sense. If the savings are low or negative, it may not be worth going for the partial payment.
Factors to consider for a partial payment
To decide whether you should go for a personal loan partial payment, consider the following factors.
Are you diverting money from other financial goals?
If you have received a lumpsum amount, which you are using to make a personal loan partial payment, it is fine. However, you must avoid diverting from your other financial goals. For example, avoid using money from an emergency fund to make a partial payment. Similarly, money meant for important financial goals like a child’s higher education, own retirement, etc., should not be used for partial payment.
Opportunity cost
Consider the opportunity cost of using the money for personal loan partial payment. Instead of using the money for partial payment, can you invest it somewhere else and generate better returns? If the answer is no, you may go for the partial payment. If the answer is yes, you may reconsider the partial payment decision.
Partial payment process
In the earlier section, we discussed the factors to be considered for deciding on the partial payment. If the partial payment decision makes sense, you may take the following steps to proceed with it.
- Decide the amount for the partial payment
- Approach the bank and inform them about the partial payment decision to complete the formalities
- Make the partial payment and share the confirmation with the bank
- After receiving the payment, the bank will adjust the personal loan outstanding amount
- Ask the bank to share a revised EMI schedule with you
Should you make a partial payment?
A personal loan partial payment has benefits as discussed in the earlier sections. However, you must calculate the interest savings benefit after factoring in the partial payment fees. If the savings are meaningful, you may go ahead with a partial payment. It can help you lower the EMI, or reduce the loan tenure and complete the repayment before schedule.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.
