How Making Part Payments on Your Loan Saves You Money

Ganesh Salunkhe
Jul 11, 2024
2 min read

Managing loans effectively is crucial for maintaining financial health. One powerful strategy to save money on loans is making part payments. Let’s explore how part payments can significantly reduce your loan costs.

Understanding Part Payments

Part payments are additional payments made towards your loan principal, over and above your regular Equated Monthly Installment (EMI). These payments reduce the outstanding principal, which in turn reduces the interest accrued over time. Let’s dive into a practical example to see how this works.

Example Scenario

Loan Details:

Loan Amount: ₹500,000
Annual Interest Rate: 11%
Loan Tenure: 5 years (60 months)

Without Part Payments

First, let’s calculate the cost of the loan without any part payments.

Monthly EMI: ₹10,869.91
Total Interest Paid over 5 years: ₹152,194.48
Total Amount Paid over 5 years: ₹652,194.48

So, without any additional payments, you would pay ₹652,194.48 over the course of the loan, which includes ₹152,194.48 in interest.

With Part Payments

Now, suppose you decide to make an additional payment of ₹5,000 each month starting from the first month. Let’s see how this changes the loan dynamics.

New Monthly Payment: ₹10,869.91 (EMI) + ₹5,000 (additional payment) = ₹15,869.91
Loan Payoff Period: Approximately 3 years (36 months)
Total Interest Paid over 3 years: ₹92,742.41
Total Amount Paid over 3 years: ₹592,742.41

Savings Calculation

Interest Saved: ₹152,194.48 (original interest) - ₹92,742.41 (new interest) = ₹59,452.07
Total Amount Saved: ₹652,194.48 (original total) - ₹592,742.41 (new total) = ₹59,452.07

Benefits of Making Part Payments

Interest Savings: In this example, you save ₹59,452.07 in interest by making additional payments. This is money that you can redirect towards other financial goals or investments.
Reduced Loan Tenure: The loan term is reduced by approximately 2 years. This not only saves interest but also gives you financial freedom sooner.
Lower Future Payments: By reducing the principal faster, future monthly payments could be lower, providing more flexibility in your budget.
Improved Credit Score: Making consistent part payments shows responsible financial behavior, which can positively impact your credit score. A better credit score can lead to more favorable loan terms in the future.

Practical Tips for Making Part Payments

Set a Budget: Determine how much extra you can afford to pay each month without compromising your essential expenses and savings.
Automate Payments: Set up automatic transfers to ensure that you consistently make part payments.
Prioritize High-Interest Loans: Focus on making part payments on loans with the highest interest rates first to maximize savings.
Review Loan Terms: Check if your loan agreement has any prepayment penalties. Some loans may charge a fee for making extra payments.

Conclusion

Making part payments on your loan is a strategic way to save money and achieve financial freedom faster. By reducing the principal amount, you lower the interest accrued and shorten the loan tenure. In our example, an additional payment of ₹5,000 per month resulted in savings of ₹59,452.07 in interest and reduced the loan term by 2 years.

If you’re managing a loan, consider incorporating part payments into your repayment plan. The long-term benefits of interest savings and financial flexibility are well worth the effort.

By understanding and utilizing part payments, you can take control of your financial future and make your loans work for you, not against you.