What Does Foreclosure Mean?

Before learning the answer to ‘does foreclosure of personal loan affect CIBIL score’, let us understand the meaning of foreclosure.

Foreclosure, also known as pre-closure, refers to the act of paying off the total loan through a lump sum payment before the end of the tenure.
You may choose to foreclose a loan for many reasons. You might want to compete the loan payment early or may have calculated that you will save on some interest if you pre-close it.

It is always important to calculate the interest amount, in comparison to the foreclosure charges before you decide to foreclose a personal loan.

Does Pre-closure of Loan Affect CIBIL?

There is no specific answer to the question ‘if foreclosure affects your credit score or not’. It depends on factors such as the loan repayment tenure, your overall credit history, etc.

Here is how foreclosing your loan may affect your credit score negatively-

Credit score and history takes into account how long you have actively paid a loan. In case you choose to foreclose a loan, you cut this period short
Credit history also takes into account the number of payment delays and timely payments made. By paying your loan at once, you give a smaller database to the next lender to assess your repayment behavior

Advantages of Pre-closing a Loan

So, does foreclosure of personal loans affect CIBIL score? Yes, they do, to some extent. But they also come with some benefits -

If you have an excess of loans to pay, and cannot manage the EMIs in a timely manner, paying off one loan may help you to better manage your finances.
You end up saving a lot of money after you have paid off a loan, as your money will no longer be diverted to the EMIs
It will help boost your morale, and bring a sense of relief

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Disadvantages of Foreclosing a Loan

On the other hand, there are many disadvantages of pre-closing a loan -

Your CIBIL score may take a hit for a short duration, which might affect your creditworthiness in future
You might have to pay high foreclosure charges depending on your lender and the tenure
Due to the huge amount you need to pay while closing a loan prematurely, you might not be able to use the funds for other necessary things

Does Foreclosure Affect Your CIBIL Score - Related FAQs

What is the lock-in period?

The lock-in period refers to a duration within which you cannot close your loan. Post that period of time, you can pre-close your loan by paying the due amount in lump sum and the foreclosure charges.

Is loan settlement and loan foreclosure the same?

No, loan settlement refers to the act of closing a loan account in which you have defaulted by paying a minimum amount. Whereas loan foreclosure is voluntary closure of a loan account by paying the remaining amount in full. Loan settlement affects your CIBIL score more negatively as compared to a loan foreclosure.

How do I remove a foreclosure from my credit score?

You cannot remove the details of a foreclosure from your credit report if you have voluntarily closed it. But, if it is a mistake on the bank or lender’s side, you can easily raise a dispute and get it rectified.

Is it compulsory to pay foreclosure charges?

Yes, banks have certain foreclosure charges if you wish to pay off your loan before the end of the tenure, and it is compulsory to pay it.

Is loan foreclosure good or bad?

Whether foreclosure is good or bad depends on your individual case. If there is a long tenure left, and you are saving on interest, it might be a good idea. But in most cases, it is best to repay the loan throughout the tenure, if it is not too long.