A Brief Guide to Personal Loan Part-Prepayment

Prepaying your Personal Loan, i.e., paying off a chunk of the loan amount before the due date, can help save interest and lower your EMI obligation. These loans are easy to avail due to their minimum documentation requirement and quick disbursals. But after all, a loan is a liability, and everyone wishes to repay it as soon as possible to get freedom from the financial burden of EMIs. Here’s everything you need to know to make a Personal Loan part-prepayment and lower your EMI obligation.

What is Personal Loan Part-Prepayment?

Part-prepayment in a Personal Loan refers to paying off a portion of your outstanding loan amount before the scheduled due date, rather than closing the entire loan at once. This flexible repayment option allows borrowers to reduce their principal amount whenever they have surplus funds available. It also saves significantly on interest payments over the loan tenure and provides financial relief by reducing the overall debt burden gradually.

Most lenders have a certain lock-in period before which you can’t opt for part prepayments, or conversely, you may be charged a fee for it. Ensure you always check the terms with your lender before making any decisions.

Also Read: 6 Easy Ways to Repay Personal Loan Faster & Save Interest

Approaches to Prepay Your Personal Loan

Here are the most common and beneficial approaches to make part-prepayments on your Personal Loan.

Use Disposable Income to Prepay Personal Loan
As a borrower, you would keep your monthly EMI below your overall financial repayment ability when you just avail a loan. But, after a few years have passed, your income is likely to increase due to factors like salary hikes and incentives. These may be used to prepay the Personal Loan.

Although banks may also offer you the opportunity to lower the loan repayment term or reduce the EMI under loan prepayment, it’s your call to choose the best option. Consider your income stability and financial comfort before making a choice. You can also use a Personal Loan EMI calculator to understand which option would be better: reducing the regular EMI, or sticking with a part-prepayment.

Also Read: What is Personal Loan: Meaning, Benefits and How to Get One

Use Windfall Gain to Prepay Personal Loan
A windfall gain is a sudden and large influx of capital triggered by external events, not so much by your own effort or initiative. Unlike a planned salary hike, windfall gains are usually unexpected. You may get windfall gains in your income due to factors like bonuses from your employer, wealth from inheritance, etc. If you get such a chance, it’s always advised to use it to prepay your loan.

Before prepaying the Personal Loan with windfall gain, always check whether it’s better to prepay or invest the surplus amount. If the return on investment seems considerably higher than the interest on the Personal Loan, you can choose to invest instead.

Example: 
Suppose you receive windfall income of Rs 5 Lakh. Your Personal Loan interest is 6.5% per annum. At the same time, interest on the bank fixed deposit is 7% p.a. 

If you fall in the 20% tax bracket, the actual return on investment would be around 5.6% per annum, which is lower than the interest applicable on the Personal Loan. 

So, you can save more money with the loan prepayment. Alternatively, you may choose to invest, get a better ROI, and then pay off the loan later with a lump sum savings amount.

Use Low-Interest Sources to Prepay Personal Loan
When you have access to funds from low-interest sources, it can be a smart strategy to utilise them for Personal Loan prepayments. Sources like PPF (Public Provident Fund) loans, loans against fixed deposits, gold loans, or borrowing from family and friends often come at significantly lower interest rates compared to personal loans. You can use the funds from these low-interest sources to pay off your higher-interest Personal Loan.

This approach reduces your total interest cost by replacing expensive debt with cheaper debt. However, this approach requires careful consideration. Before opting for it, ensure that the interest rate differential is substantial enough to justify the switch. Also, consider factors like loan tenure, processing fees, and your ability to repay the new loan.

Also Read: Is Insurance Mandatory for Personal Loan?

How to Decide When to Prepay Your Personal Loan?

Here are some convenient ways to decide when to prepay your outstanding Personal Loan balance:

Calculators: If you’re looking to prepay your Personal Loan, but can’t figure out how to, you can opt for a Personal Loan pre-closure calculator. It’s a type of EMI calculator that helps you make informed decisions about closing your loan early, calculate potential savings, and plan your finances wisely.

Prepayment Penalties: This is a crucial step; always check with the lender if there’s any prepayment penalty that’s applicable. Very often, lenders will impose a penalty that depends either on the sources you use for the prepayment or the time frame in which you do it.

Governmental Regulations: Try to remain aware about governmental policies since they could impact your decision. For instance, the RBI has announced that floating-rate loans sanctioned or renewed from January 1, 2026, onwards will not attract any prepayment charges, offering borrowers more flexibility. Additionally, a stable prediction of the repo rate may mean people with flexible loans won’t have much to gain from rate cuts, leaving prepayment as the viable option.

Also Read: What is Repo Rate?

To Conclude

Weigh your options well and do the math on your savings before opting for part prepayments. More importantly, don’t rush towards it and put your monthly EMI plan at risk. Part prepayments should only be considered when you receive windfall income, can create a corpus from disposable income not allotted for debt payments, or have cheaper credit options.

Poonawalla Fincorp offers fast and hassle-free personal loans at competitive interest rates without any prepayment charges after the first six EMIs, provided that you use your own funds to make the prepayment. Apply now!

Frequently Asked Questions

Can I pay extra EMIs for a Personal Loan?
Yes, you can pay extra EMIs for a Personal Loan; this is treated as a part-prepayment towards your principal amount. The extra amount directly reduces your outstanding principal, thereby saving interest and leading to early closure of the loan.

How often can I make part-prepayments during my loan tenure?
The prepayment period that’s allowed differs from lender to lender. You should check the loan agreement or contact your lender to find out the exact terms and conditions under which it can be done.

Can part-prepayment affect my credit score?
Part-prepayment generally has a positive impact on your credit score as it demonstrates financial discipline and reduces your debt-to-income ratio. Regular part-prepayments show responsible debt management to credit bureaus.

Is it better to invest surplus money or use it for loan prepayment?
It depends on whether the loan interest rate exceeds returns expected from an investment after taxes and the risks involved are considered. If the rate is higher than the rate of post-tax return from relatively safe investments, generally, it is better to prepay.