What is the limit of part payment in a personal loan?

Personal loan part payment is a valuable feature offered by lenders, allowing borrowers to reduce their outstanding loan amount by paying a portion of it before the due date. Unlike full prepayment, part payments give you flexibility, enabling you to manage your finances more effectively. It can help reduce your interest burden over time, shorten the loan tenure, or lower your EMI (Equated Monthly Instalment) amounts. By strategically making part payments, you can significantly reduce your debt without committing to an entire lump sum. However, every lender has specific rules regarding part payments, such as limits, fees, and the number of times you can make such payments during the loan tenure. Understanding how part payment works, its benefits, and how it can affect your loan can help you make informed decisions to manage your loan more efficiently. This guide will explore the key aspects of part payments on personal loans.

What is the part payment limit for personal loans?

Personal loan part payment limits vary across lenders, but generally, they allow you to pay off a certain percentage of the outstanding loan amount before the scheduled repayment period. Most lenders impose a minimum and maximum limit on how much you can part-pay at a time, ensuring that the borrower still adheres to the loan agreement’s basic structure.

For instance, some banks may allow a part payment of 20-30% of the outstanding balance. Others may have a fixed minimum amount (e.g., ₹10,000 or ₹50,000), below which part payments are not accepted. These limits ensure that the borrower still retains a substantial loan amount to be repaid through the regular EMI process. Additionally, some lenders may cap the number of part payments you can make within a year.

It’s essential to check with your lender regarding their specific part payment policies, as making payments outside the defined limits might incur penalties or fees.

How does part payment work in personal loans?

Part payment in personal loans refers to paying a portion of the principal loan amount ahead of schedule. When you make a part payment, it reduces the principal balance, which in turn decreases the overall interest amount you would have paid over the loan tenure.

Typically, part payments are done after you’ve already paid a certain number of EMIs. Some lenders have a lock-in period, where you are only allowed to make part payments after a set time (usually 6 months to a year). Part payments reduce the outstanding balance, giving you two options: either reduce your monthly EMI or shorten the loan tenure.

For example, if you took a personal loan of ₹5,00,000 and make a part payment of ₹1,00,000, the lender will recalculate your EMI based on the remaining principal of ₹4,00,000. Alternatively, you could keep the EMI unchanged but reduce the loan tenure, saving on interest over time.

Benefits of making part payments on your personal loan

1. Reduces Principal AmountPart payments help reduce the outstanding principal amount, which directly lowers the total interest you’ll need to pay over time.
2. Lower Interest CostBy reducing the principal, you are also reducing the interest cost, leading to savings on the overall loan repayment.
3. Shortens Loan TenurePart payments can help you repay the loan faster, potentially shaving off months or even years from your loan tenure.
4. Decreases EMI BurdenYou can also choose to reduce your monthly EMIs, making your loan repayment more manageable and aligning it with your current financial capacity.
5. Flexibility in RepaymentPart payments offer the flexibility to adjust your loan according to your financial situation, without committing to a full prepayment.

How to make a part payment on your personal loan?

• Check Part Payment PolicyBegin by reviewing your lender's policy on part payments, including any limits or restrictions. This can usually be found in the loan agreement or by contacting customer service.
• Calculate the Payment AmountDecide how much of the outstanding principal you want to pay off. Ensure it falls within your lender’s minimum and maximum part payment limits.
• Choose the Impact: Tenure vs. EMIBefore making the payment, decide whether you want to reduce your EMI or shorten your loan tenure. This can have a significant impact on your loan’s overall interest cost.
• Log in to Net Banking or Visit BranchIf your lender allows part payments online, log in to the net banking portal and follow the instructions to make the payment. Alternatively, you can visit your lender’s branch and make the payment in person.
• Receive Updated Loan StatementAfter the part payment is made, request an updated loan statement from your lender, reflecting the reduced principal and updated EMI or tenure.

Can part payments lower your personal loan interest rate?

1. Indirect Reduction in InterestAlthough part payments don’t directly reduce the interest rate, they do reduce the principal, which in turn decreases the total interest paid over the loan’s lifetime.
2. Lower EMI or TenurePart payments can lead to either lower EMIs or a shorter tenure, both of which can help reduce your overall interest burden, even if the rate remains the same.
3. Multiple Part PaymentsRegular part payments can significantly reduce the outstanding principal, lowering the interest accrued each month, which may result in significant savings.
4. Revised Loan TermsSome lenders may offer revised loan terms, including a change in the interest rate, depending on how much of the principal has been repaid.
5. Evaluate Your Financial PlanConsider your financial situation before making part payments to ensure you’re optimising savings on interest over the course of your loan.

What happens if you exceed the part payment limit?

Exceeding the part payment limit on your personal loan can result in various consequences depending on your lender’s policies. Here's what might happen:

• Additional ChargesLenders may impose extra fees if you exceed the part payment limit. This could include processing fees, penalty charges, or administrative costs for handling payments beyond the allowed limit.
• Non-Acceptance of PaymentSome lenders may reject any part payment that exceeds their prescribed limit. In such cases, you will need to make a payment within the acceptable range or adjust your repayment strategy.
• Impact on Loan Tenure or EMIExceeding the limit may complicate the recalculation of your EMI or loan tenure. Lenders may not allow a significant reduction in EMI or tenure if part payment exceeds a certain percentage of the loan balance.
• Restriction on Future PaymentsExceeding the part payment limit might restrict you from making additional payments for a certain period. This can hinder your ability to further reduce your outstanding loan amount.
• Loan Agreement ViolationExceeding the part payment limit may be considered a violation of the loan agreement, potentially resulting in stricter terms for future part payments or repayment.
• Prepayment ClauseExceeding the limit may trigger prepayment clauses, leading to a requirement to clear the entire loan earlier than anticipated, especially in cases where regular part payments are not encouraged.

Before exceeding the limit, it's essential to review the lender’s policies on part payments. Opting for a personal loan without prepayment charges can help avoid penalties, and you can track your personal loan status to stay informed about your payments.

Conclusion

In conclusion, making part payments on personal loans is an effective strategy to reduce the principal amount, lower interest costs, and shorten the loan tenure. However, it is crucial to be mindful of the lender’s specific limits and policies regarding part payments to avoid additional fees or restrictions. Understanding how part payments work and their benefits enables borrowers to manage their finances more efficiently. Always review the terms of your loan agreement, consult with your lender, and track your loan status regularly to ensure smooth repayment and financial flexibility throughout the loan tenure.