Prepayment and partial payments in personal loans can offer borrowers the flexibility to manage their finances more efficiently and save money in the long run. By making additional payments or settling the loan early, borrowers can reduce the total interest paid over the loan term, shorten the repayment period, and improve their credit score. Opting for prepayment options allows for financial freedom and faster debt clearance, leading to greater financial stability and savings.
What is Personal Loan Prepayment?
A Prepayment in personal loan means paying off the outstanding loan amount before the pre-defined repayment duration ends. Prepayment allows borrowers to pay the future interest amount in advance and close the loan early.
It reduces the total interest amount paid over the loan lifetime. Many loan providers allow prepayment but may charge a foreclosure fee for it. Overall, it helps borrowers save on interest costs and become debt-free sooner than scheduled.
The Benefits of Personal Loan Prepayment
Prepaying your personal loan can offer numerous benefits:
Go Debt-Free
By prepaying your loan early, you can become debt-free sooner than the scheduled repayment period. It will reduce the burden of monthly instalments and give you additional financial flexibility. This can allow you to utilise your funds for other important goals like children's education or retirement planning.
Improve Credit Score
Your credit score is adversely impacted if you have multiple loans or maxed-out credit cards. By closing existing loans early, your debt utilisation ratio will improve, which signals responsible financial behaviour to lenders. It makes it easier to borrow in the future at better interest rates if needed. It also shows discipline, which boosts your credibility as a borrower.
Save Up on the Interest Amount
A major chunk of your EMI goes towards paying interest on the loan amount. By prepaying the loan, you can avoid paying interest for the remaining tenure. It translates to significant savings, especially on high-interest personal loans. The sooner you prepay, the higher the interest savings amount will be. This extra money can then be invested to generate higher returns.
Reduce Your Debt Burden.
Carrying multiple debts leads to a heavier debt burden over time if not paid on schedule. By closing existing debts early, your overall debt liability is reduced considerably. With fewer outstanding loans, you will have a lower debt-to-income ratio, strengthening your financial profile. This debt reduction eases future cash flows and lessens the stress of monthly repayments.
What is Part Payment in Personal Loan?
Partial payment in personal loan allows borrowers to prepay their loans by paying off a portion of the balance before the loan's scheduled due date. These partial payments can be made instead of or in addition to the regular monthly instalments.
On personal loans, partial payments are made by lowering the principal amount. Any amount you pay toward the principal balance instead of the interest charges is applied when you make a partial payment. It may help you save money by lowering the total interest you pay on the loan over its term.
Advantages of Part Payment in Personal Loan
Below are some of the crucial advantages of part payments:
Save Money on Interest
By making partial payments, the outstanding loan amount is paid off faster. It directly reduces the total interest payable on the loan since interest is charged only on the outstanding amount. Over the loan term, it can help save a substantial amount in interest costs.
Reduce the Interest Amount
Every time a borrower makes a partial payment, a part of the principal amount is paid in advance. This reduces the principal amount on which interest is calculated at the start of the next billing cycle. Gradually lowering the principal amount can significantly reduce the total interest charged over the tenure.
Reduce Loan Tenure
By prepaying partial amounts regularly, the loan gets paid off earlier than the initial loan tenure. It is because each additional payment goes towards reducing the outstanding principal. Completing repayment sooner directly compresses the total number of months required to repay the loan.
Conclusion
Choosing to pay partial or prepayments on your Kotak811 personal loan can be a great option to be debt-free and increase your credit score. It gives you comfort in addition to financial savings. Making wise decisions that support your financial well-being and taking an active approach to managing your money are fundamental. Therefore, be mindful of these things and move forward confidently the next time you consider taking out a personal loan.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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