Part Payment or Investment: What's the Right Choice?

Part Payment or Investment: What's the Right Choice?


When surplus funds are available, a common financial dilemma arises: should the amount be used to part pay a loan or invested for potential returns? Making an informed decision is essential to optimise financial well-being. Federal Bank offers a wide range of solutions, from flexible loan repayment options to diverse investment products, helping individuals balance debt reduction with wealth creation. With the right guidance, borrowers can decide which approach aligns better with their financial goals and current market conditions. This article explores the key factors to consider when evaluating part payment versus investment.

The Basics of Part Payment

Part payment, also known as partial prepayment, involves paying an amount over and above the regular EMIs to reduce the loan principal. This strategic move can yield several benefits:

  1. Reduced Interest Outgo : By lowering the principal, borrowers decrease the overall interest paid over the loan tenure.
  2. Shorter Loan Tenure : Part payments can help close the loan earlier than the original end date.
  3. Improved Credit Score : Timely repayments and proactive debt management boost creditworthiness.

However, it's essential to check with the lender about any prepayment charges applicable on part payments. Federal Bank borrowers can also consult Feddy for quick answers on part payment rules or connect with a relationship manager for tailored advice on the optimal prepayment strategy.

The Case for Investment

On the flip side, investing surplus funds can potentially generate higher returns compared to the interest saved through part payment. Here's why investment might be a compelling choice:

  1. Wealth Creation: Prudent investments in avenues like mutual funds, stocks, or fixed deposits can grow money over time.
  2. Liquidity: Unlike part payments, investments offer the flexibility to access funds when needed.
  3. Diversification: Spreading money across different asset classes helps mitigate risk.

Before taking the plunge, assess one's risk appetite, financial goals, and investment horizon to choose suitable instruments. Federal Bank provides a wide range of safe and growth-oriented investment options that allow customers to choose according to their preferences.

Why Interest Rates Matter in the Choice

The prevailing interest rate trend plays a crucial role in deciding between part payment and investment. Here's how:

  1. Falling Interest Rates : In a declining rate environment, the returns from investments may surpass the interest saved through part payment. For example, if a loan carries an 8% interest rate while investments yield 10%, investing could be the wiser choice.
  2. Rising Interest Rates : Conversely, when rates are on an upward trajectory, part payment becomes more attractive. By reducing the principal, individuals shield themselves from the increased interest burden.

Keep a close eye on the Reserve Bank of India's monetary policy stance and adjust strategy accordingly.

Weighing ROI Before Making a Move

To make an informed decision, compare the return on investment (ROI) from part payment against potential investment returns.

Example 1

  • Loan Amount: ₹20 lakhs
  • Interest Rate: 9% p.a.
  • Remaining Tenure: 10 years
  • Part Payment Amount: ₹2 lakhs

A part payment of ₹2 lakhs can save approximately ₹3.5 lakhs in interest over the remaining tenure. Investing the same ₹2 lakhs in an instrument yielding 12% annual returns could grow the investment to around ₹6.2 lakhs in 10 years. This example shows how investment can sometimes deliver stronger results, though the actual outcome depends on consistent returns and market stability. For many, comparing these numbers with their personal goals helps make the smarter choice.

Example 2

  • Loan Amount: ₹30 lakhs
  • Interest Rate: 8.5% p.a.
  • Remaining Tenure: 15 years
  • Part Payment Amount: ₹3 lakhs

Making a part payment of ₹3 lakhs towards the loan can reduce the total interest outgo by approximately ₹6.2 lakhs over the remaining tenure. Additionally, it can shorten the loan tenure by around 2.5 years, helping you become debt-free sooner. If the same ₹3 lakhs is invested in a mutual fund or other instrument yielding an average annual return of 12%, it could grow to approximately ₹13.5 lakhs in 15 years.

So, What’s the Smarter Move, Feddy?

In the battle of part payment versus investment, there's no one-size-fits-all answer. The decision should be guided by factors like the interest rate environment, ROI potential, and overall financial objectives. As a rule of thumb, lean towards investment if the returns outweigh the interest saved through part payment, especially in a falling rate scenario. Conversely, prioritize part payment when rates are rising and investment returns are muted.

Federal Bank understands the importance of tailored financial solutions. Feddy, Federal Bank’s intelligent virtual assistant, helps customers by providing instant answers on loan products, deposits, and repayment options, while also guiding them to the right channels for detailed support. Additionally, the bank's dedicated relationship managers can help individuals assess their loan repayment and investment options, ensuring they make the right choice. Explore Federal Bank's comprehensive suite of deposit products and wealth management services to embark on a fruitful investment journey.