Personal Loan Foreclosure
Personal loans come with a set repayment term that is agreed upon by the lender as well as the borrower along with a fixed or variable rate of interest. The repayment tenure can vary between a few months to a few years and the EMI is decided based on this as well as the interest rate charged. There are three ways in which loan repayment can be made:
- Repaying the loan through the entire term
- Paying a large part of the loan prior to the completion of the tenure i.e. part payment
- Completely paying off the loan prior to the completion of the term i.e. foreclosure
What is Personal Loan Foreclosure?
There are instances wherein an individual will come into a large sum of money and wishes to repay the entire loan even before the completion of the repayment term. This is known as loan foreclosure or sometimes even loan pre-closure. If this option is availed for personal loan repayment, it is known as personal loan foreclosure or foreclosure/pre-closure of personal loans. Through this legal procedure, the borrower can benefit from a reduction in interest liability as well as early closure of the loan account.
Another option that certain borrowers avail of is to pay a part of the loan i.e., an amount that is more than the EMI. This again occurs when they come into a significant amount of money or have a lump sum amount of idle savings. By doing so, the principal amount that is unpaid is reduced, thereby reducing the amount paid towards EMI as well. However, customers who wish to opt for this must know that part-payment can be advantageous only if a significant amount of money is paid towards this.
How is Personal Loan Foreclosure Calculated?
Every bank or financial institution charges a different rate when it comes to loan foreclosure. While most lending institutions allow borrowers to pre-close their loans, there are certain conditions imposed. Some of these are:
- Option to foreclose a loan is only provided after a certain number of EMIs have been repaid
- There is a penalty charged for prepayment which ranges from 1% to 5% or even more depending on the outstanding balance left before foreclosure. Therefore, borrowers are advised to check these charges prior to applying for the same
There are a number of online foreclosure calculators that provide the amount of penalty that has to be paid. The details that need to be entered are the loan amount, number of EMIs that have been paid, interest rate charged, repayment term, and the month of foreclosure. The foreclosure charges, if levied, are a certain percentage (1% to 5%) of the outstanding loan. Customers must note that this percentage can vary from lender to lender.
How to Foreclose Loans
Foreclosure of loans is not a complicated process. The steps given below must be followed:
- Borrowers must first contact their lenders and check if foreclosure is an available option and check related information such as foreclosure penalty and number of EMIs that will have to be paid in order to be eligible
- If all the eligibility criteria are met, they must then apply for the same through the bank either online or offline, and provide the necessary documents
- Once the application has been processed, the steps to be taken will be provided by the lending institution. This is usually allotment of a payment ID or another option through which applicants can make the foreclosure payment
Once all the charges have been paid and the loan has been foreclosed, a NOC or No Objection Certificate must be availed from the lending institution as proof that all dues have been cleared. This also ensures that the lender does not have any more legal right to the documents given. Additionally, all the original documents that were provided during the loan application must be obtained to (1% to 5%) of the outstanding loan. Customers must note that this percentage can vary from lender to lender.
Foreclosure of loan has an impact on the borrower’s CIBIL score as well (more on this below), therefore customers must ensure that their loan information has been duly updated by the banks at the earliest so as to avoid discrepancies later on.
How to Foreclose Money View Loans
Money View is a highly trusted loan provider in India with competitive rates of interest and an extremely convenient, customer-friendly loan availing process. Personal loans are one of the most popular offerings by Money View with the interest rate starting at just 1.33%. In case customers who have borrowed from Money View wish to avail of personal loan foreclosure, the following conditions apply:
- If the EMI repayment period is 6 months or less, foreclosure is not allowed
- If the EMI repayment period is between 7 months to 18 months, foreclosure is allowed after a 6 month lock-in period as a minimum of 6 EMI payments are compulsory
- In case the EMI repayment term is 18 months or over, then foreclosure is permitted after a lock-in period of 12 months as 12 EMI payments are compulsory
In case borrowers are eligible to avail this option the final amount they will have to pay is – Final Foreclosure Amount = Outstanding Principal Amount + Interest charge as on that day + Overdue EMIs and Pending Penalties, if applicable
However, there are no specific foreclosure penalties that are applicable. For further details, borrowers can contact Money View directly at email@example.com
Benefits of Foreclosing Personal Loans
Opting for loan foreclosure comes with a plethora of benefits. Some of these include:
- The overall interest liability is reduced on the loan by foreclosing the loan. While most lenders charge a penalty, it is still advantageous to opt for foreclosure whenever possible
- While loan foreclosure will not have an immediate effect on the borrower’s credit score, in the long run, it can be beneficial
- Certain lending institutions allow individuals who cannot opt for foreclosure to repay their loan through multiple part payments. Each time the borrower receives a lump sum amount, it can be used to reduce the EMI and total interest paid as well
- The biggest advantage is that borrowers can repay their loan earlier, while enjoying the benefits of reduced EMI as well as rate of interest
Impact of Foreclosure on CIBIL Score
A CIBIL score is a three-digit numerical summary of an individual’s creditworthiness. The higher the number (over 750) greater are the chances of the borrower availing a loan at a competitive rate of interest. This score is dependent on a number of factors and loan repayment is one of the most important. Timely repayment of a loan, especially personal loans have a positive impact on the individual’s credit score.
Does the pre-closure of personal loans affect the CIBIL score? Yes, they do, and positively in fact. While the effect is not immediate, in the long run, foreclosure essentially means that the loan account has been successfully closed which increases the credit rating. Part-payment on the other hand does not have a significant impact on the credit score.
Things to Consider Before Opting for Personal Loan Foreclosure
In case a borrower opts to foreclose a personal loan, the following points must be borne in mind:
- Every lending institution imposes a different foreclosure penalty and related conditions. While prepayment does reduce the burden of the loan, if the prepayment penalty is extremely high in relation to the debt, foreclosure is not a viable idea. This option must be availed only if it is beneficial to the borrower’s financial situation
- Certain loans such as home loans come with tax rebates. While personal loans generally do not enjoy this benefit, customers are asked to verify the impact of foreclosure on their tax payments
- If a borrower has come into a large sum of money, options to invest the same must also be explored. If this is financially more advantageous than opting for foreclosure, then it must be availed
- Foreclosure of loans is more beneficial is availed earlier in the loan tenure as the interest liability is higher in the beginning
Choosing a loan amount that can be repaid quickly is always a good idea. Every option the borrower decides to avail of, whether it is to pay the loan throughout the repayment tenure, opt for part payments, or to foreclose the loan should be beneficial to his/her financial situation. While foreclosure does come with a multitude of benefits, the fine print must also be read and understood.