Prepayment, Pre-Closure and Part Payment: Everything you need to know

  • Updated on: 10 Jan 2024
  • Published on: 8 Jan 2024
Prepayment, Pre-Closure and Part Payment: Everything you need to know

Making a part payment of a personal loan or choosing any of the other prepayment options offers many benefits. It reduces your interest burden and makes you credit-free early. You can choose the right option to increase your savings by understanding how they differ. 

Read on to learn the difference between these loan repayment methods.

What is the Part Payment of a Personal Loan?

Part-payment, as the name suggests, means repaying a part of the total loan amount when you have idle funds. This reduces the outstanding balance; hence, your EMIs and interest amount also decrease. 

Consider the following example:

  • You get a loan of ₹10 lakhs for 5 years
  • The interest and EMI are calculated on ₹10 lakhs, which is the borrowed amount

Say you get surplus funds and plan to make a part payment of a personal loan of ₹5 lakhs after 2 years. Then, the interest and EMI will be calculated on the remaining ₹5 lakhs for 3 years. This helps decrease your interest outgo and minimise your borrowing costs for the remaining loan tenure.

What is the Prepayment of a Personal Loan?

Prepaying your loan is also called foreclosing. It refers to when you repay the entire loan before the loan tenure ends. Usually, financial companies allow borrowers to fully prepay the principal amount after the first year of repayment. 

The prepayment of a loan can be beneficial as you save on interest. Consider the following scenario:

  • Loan amount: ₹2 lakhs
  • Interest rate: 15%
  • Tenure: 5 years

Here’s what you’ll need to pay:

  • EMI: ₹4,758
  • By the end of year 1: ₹29,039 towards the principal amount and ₹28,057 as interest

In the aforementioned hypothetical example, prepaying the entire loan will save you approximately ₹57,422 as interest.

What is the Pre-closure of a Personal Loan?

The option of pepaying the outstanding amount in a single instalment before the loan term ends is what this means. You can reduce your interest liability and close your loan account before the term, helping you save additional funds.

The financial institution will calculate the balance after considering the following parameters:

  • Total outstanding amount
  • Remaining loan term
  • Interest paid

Remember to collect the ‘No-dues’ certificate after the pre-closure of a personal loan as well as the original documents from the financial institution.

Consider the following situation:

  • You take a loan of ₹5 lakhs for 5 years
  • You pre-close the loan in a single instalment after 2 years
  • Then, you will save on interest payments for 3 years once you pre-close your loan

Difference Between Part Payment, Prepayment and Pre-closure

Check out this table to understand how these prepayment methods differ:

ParameterPart Payment of a LoanPrepayment of a LoanPre-closure of a Loan
Principle loan amountThe principal amount of your loan reducesThe principal amount of your loan reducesRepayment of the entire outstanding loan amount
EMIThe EMI payment will decreaseThe EMI payment will decreaseNo EMIs since the entire loan amount is paid off
Interest rateRemains the sameReducesThe rate of interest remains the same, but you do not need to pay any interest since the entire loan amount is paid off

What to Consider Before Prepaying Your Loan?

Before making a loan prepayment, note the following criteria:

  • Current interest rates of the loan
  • Remaining tenure of the loan
  • Future financial goals and fund requirements
  • Your finances and repayment capacity
  • Terms and conditions of the lender, such as prepayment fees

By understanding these practices of prepaying loans, you can service your debt easily and manage your finances effectively. Try to plan for prepayment right when you are applying for a personal loan. 

With Fibe’s Instant Cash Loan, you can get up to ₹5 lakhs at affordable rates and zero pre-closure charges. Download the Personal Loan App or log in to our website today to get the required funds with ease!

FAQs on Part Payment Vs Prepayment Vs Pre-Closure

How are prepayment and pre-closure different?

Here’s how these financial terms differ: 

  • Prepayment means repaying a part or the full loan before the end of a loan tenure
  • Pre-closure means repaying the full loan amount in a single instalment before the end of the loan tenure

Is foreclosing and pre-closing a personal loan the same thing?

Yes, these terms can be used interchangeably since, in both cases, you repay the borrowed amount as a lump sum and close your loan account early. This helps you save on interest charges. However, you should only proceed after factoring in the fees levied by the financial institution. 

How is partial prepayment and full prepayment different?

Here’s how:

  • Partial payment means repaying only a part of a loan amount before the tenure ends
  • Full prepayment means repaying the total loan amount in a lump sum before the end of the tenure

Is pre-closure of a loan good or bad?

It can be beneficial for you to pre-close a loan since it:

  • Helps decrease your interest costs
  • Makes you debt-free earlier

Remember, you must consider this option only when you have surplus funds and do not deplete all your emergency funds.

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