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Part Payment On Home Loan - Uses and Benefits

Published On Dec/14/2023

Purchasing a home is a significant milestone in one's life, but the journey to full home ownership often involves taking out a home loan. While it's common for borrowers to make regular monthly payments, there is another powerful tool at their disposal - part payment on home loans.

In this blog, we will explore the concept of part payment, its uses, and the benefits it offers to homeowners.

What is Part Payment on Home Loan?

When you make a part payment on a home loan, it involves repaying a significant portion of the loan amount before the scheduled completion of its tenure. To illustrate, let's say you have obtained a home loan of Rs. 30 lakhs, which is to be repaid over a period of 30 years. However, you decide to make an upfront lump sum payment of Rs. 5 lakhs, followed by regular payments as per the agreed terms until the loan is fully paid off. Partial payment of home loan can help reduce the outstanding balance and accelerate the loan repayment process. Homeowners can choose to make a lump sum part payment or smaller periodic payments depending on their financial situation.

Uses of Part Payment on Home Loan

1. Reduce Interest Burden: One of the primary uses of part payment is to reduce the interest burden over the loan tenure. By making an extra payment towards the principal amount, you can lower the outstanding balance. This, in turn, reduces the interest charged on the remaining amount, potentially saving a significant amount of money over the long term.

2. Shorten Loan Tenure: Another advantage of part payment is that it can help you shorten the duration of your home loan. By making regular part payments, you can reduce the principal amount faster, leading to an early payoff. This not only saves on interest but also grants financial freedom and peace of mind.

3. Enhance Creditworthiness: Making part payments demonstrates financial discipline and responsibility. It showcases your ability to manage your finances effectively. This positive financial behaviour can enhance your creditworthiness, making it easier to obtain future loans at favourable terms and conditions.

Benefits of Partial Payment of Home Loan

1. Increased Equity: Part payments contribute to increasing home equity. As you reduce the principal balance, the equity in your property grows. This increased equity can be beneficial in the future if you decide to secure additional financing for other purposes.

2. Peace of Mind: Part payments provide you with a sense of accomplishment and peace of mind. Knowing that you are actively reducing your debt and progressing towards home ownership faster can alleviate financial stress and improve overall well-being.

3. Improved Debt-to-Income Ratio: A lower outstanding loan amount due to part payment can positively impact your debt-to-income ratio. This ratio is an important factor considered by lenders when assessing creditworthiness for future loans or financial transactions.

4. Option for Loan Refinancing: Part payment can potentially open opportunities for loan refinancing. With a reduced loan amount, you may be eligible for better interest rates and terms when refinancing your home loan. This can lead to further interest savings and improved loan terms.

Are Part Payment and Prepayment the Same?

No, part payment and prepayment are not the same thing. While both involve making payments towards a home loan, they differ in their purpose and impact on the loan.

Part Payment: Part payment refers to making a partial payment towards the outstanding principal amount of a home loan. It involves repaying a portion of the loan before the completion of its tenure.

The intention behind part payment is to reduce the outstanding balance, which can result in interest savings and potentially shorten the loan tenure. Part payment allows you to make additional payments while continuing with the regular repayment schedule until the loan is fully paid off.

Prepayment: Prepayment, on the other hand, refers to the complete repayment of the outstanding loan amount before the scheduled tenure. It involves clearing the entire loan balance in one go, typically using a lump sum payment.

By prepaying the loan, you eliminate the remaining principal amount, and the loan is considered fully repaid. Prepayment can save a significant amount on interest and result in early loan closure.