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While paying debt off totally or in part often makes sense financially, would this affect your credit score? When making smart decisions, it is important to know in what way partial repayments will affect your credit health. This guide outlines what partial repayment means, the potential benefits, and how it may impact your credit score.
What is part payment on a personal loan?
When you pay your EMI greater than your monthly EMI but less than the full amount you owe on a loan, this is called a partial-pay or partial prepayment.
“Part-payment of a loan, when done along with regular EMI payments, is a smart way to reduce your overall debt and ease your financial load. It can even give a boost to your credit score over time. But the part-payment must be planned and not used to make up for missed EMIs, as that could negatively impact your credit score,” says Anand Agrawal, Co-founder and CPTO, Credgenics.
Benefits of part-payment
- Less interest outlay: The excess amount reduces principal, thereby reducing the total interest paid over the loan term.
- Reduced loan term: Your loan would be paid off sooner, and thus would enable your EMI payment to free cash flow sooner, if you continue the payments.
- Build your credit usage: Paying part-payments on time signals to lenders your fiscal responsibility.
Will part-payments improve your credit score?
Part-payments are a financial plus, but part-payments have maybe, an indirect impact on the user’s credit score:
- No new credit events reported as part-payments are not new entries like new loans.
- EMI paid on time is used to promote positive payback history for a report cycle in each credit report
- The lower outstanding balances provide reduced credit utilisation on secured loans and diversified total credit mix.
Overall, they improve your credit profile but will not reflect as an enhanced score.
Key credit factors affected
- Credit utilisation: The difference between the approved amount vs what has been issued for loans. A smaller amount after a partial payment also looks better than a higher amount.
- Credit mix: If you are managing your balances (for instance, reducing loan tenor), it is evidence of inconsistent credit behaviour.
- Timeliness of payment: Partial payments show lenders you are paying on time and support a blemish-free payment history.
Are there any downsides?
There are some benefits of part-payments, and only a small number of drawbacks financially:
- Prepayment penalties: They may pertain to you, especially for loans with flexible rates.
- Reduced ‘active’ account age: The impact is small, but your tenure becomes shorter and relatively reduces the average age of your loans.
- Reduced interest contribution: This is more of a way of saving some money than it is a penalty to your credit, even if you are giving up interest reduction.
When to consider part-payment?
Use these occasions to provide a partial payment:
In conclusion, part-payments inherently promote positive credit behaviour which ultimately will increase your credit score over time. It is simply a matter of weighing your long-term savings, overall, against any prepayment penalties. If you build some intentional part-payments into your financial goals, you can improve your credit profile and pay down debt faster!
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Disclaimer: Mint has a tie-up with fin-techs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.
