Personal Loan Foreclosure and Repayment Procedure

Loan foreclosures are a good option if you took a loan in need but are more financially stable now. Loan foreclosure means that you repay the entire amount before the repayment tenure ends. You can do so by paying a lump sum amount. 

If you avail of this option for personal loan repayment, not only will the interest liability be reduced, but the loan account will be closed early as well. However, there are some things you need to be careful about before you close your loan before the tenure ends. 

We will learn more about personal loan foreclosures here.

How is Personal Loan Foreclosure Calculated?

Loan foreclosure or complete prepayment is when you repay your loan before the tenure ends. Closing the loan before its tenure allows you to avoid the additional interest charges you were supposed to pay throughout the loan period. 

Every financial institution charges differently for loan foreclosure. While most lending institutions allow borrowers to pre-close their loans, there are certain conditions imposed, including -

• The option to foreclose a loan is only provided after a certain number of EMIs have been paid.

• There is a penalty charged for prepayment which ranges from 1% to 5% or more depending on the outstanding balance and the lender’s rules.

Several online foreclosure calculators can calculate the penalty that has to be paid. 

How to Foreclose Your Personal Loan?

Foreclosure of loans is not a complicated process if you follow the steps mentioned below -

STEP 1: Check with your lender if foreclosure is possible. Gather information about foreclosure charges and eligibility.

STEP 2: If you meet the eligibility criteria, apply for loan foreclosure online or offline and provide the necessary documents.

STEP 3: Once the application is processed, follow the steps mentioned by the lender. Usually, a payment ID will be allotted or any other option will be given to make the foreclosure payment.

STEP 4: Once you pay the dues and the loan has been foreclosed, the lender will provide you with a No Objection Certificate (NOC). It will act as proof that all dues have been cleared and that the lender does not have any more legal right to the documents given.

Foreclosure of Personal Loan through Moneyview

If you’ve taken a personal loan through the Moneyview digital lending platform, you could foreclose or pay off the entire loan amount anytime without penalty, based on the tenure of your loan, subject to certain terms and conditions.

Please note that there are no foreclosure charges for personal loans from Moneyview’s partner lenders. The terms and conditions for foreclosure of personal loans through the Moneyview app are given below -

Here are some other important points related to loan foreclosures on the Moneyview digital lending app -

• If you are eligible, you can foreclose your loan directly from the app

• You will see a ‘Foreclose Loan’ section on the app once you are eligible

• Loan foreclosure is allowed only after the 8th of every month

Loan Foreclosure: What May Work for You

Loan foreclosures might seem like an attractive option in some cases. Let’s look into some of the benefits of loan foreclosure -

• Reduces Financial Burden

You may have chosen a longer tenure to lower your EMI amount. However, in the long run, it converts to higher interest. Through loan foreclosure, you can save a lot on interest. Moreover, once the loan is cleared, you don’t have to worry about paying the EMIs regularly.

• No Prepayment Charges on Floating Rate Loans

Reserve Bank of India has strictly asked banks not to charge foreclosure penalties against early repayment of floating-rate loans. This means you won’t incur additional costs if you prepay the entire personal loan amount.

• Mitigates Collateral-Related Risks

Once you repay the loan, you are not liable to pay anything more to the lender. This automatically nullifies the risk of defaulting and frees your collateral (which could be your property) in the process.

Loan Foreclosure: What May Not Work for You

Loan foreclosures also have some disadvantages associated with them. Let’s look at a few of the cons - 

• Immediate Financial Stress

Foreclosing your loan will, no doubt, reduce your financial burden in the long run. However, acquiring the lump sum amount to pay off the whole loan at once might seem challenging, especially during financially demanding situations. 

Hence, it is wise to opt for foreclosure only when you have sufficient funds to close the loan and handle regular finances. 

• Missing Out on Investment Opportunities

If you have come by a lump sum amount, you can use it for investments instead of paying off your existing loan. Mutual funds, SIPs, stocks, FDs and more can give you high returns on your money that you can use to pay off the loan. This way, you can earn as well as pay off your loan easily. 

• Additional Costs Involved

Although banks are not allowed to levy penalty charges on floating-rate loan prepayments, few lenders still impose penalties, especially if it is a fixed-rate loan foreclosure.

If your lender is one of them, you may have to incur additional costs, which can be heavy on your pocket depending on the outstanding or unsettled amount.

Impact of Personal Loan Foreclosure on Credit Score

Your credit score is a three-digit numerical summary of an individual’s creditworthiness. The higher your score, the better your chances of procuring a loan. Generally, a score of 750 and above is considered good for most credit products.

One of the key factors affecting your credit score is your credit age. When your loans and credit cards are active for a long time, the lenders can judge if you can pay the loan EMIs in a timely manner.

When you pay the EMIs without fail every month for a long period of time, it improves your overall creditworthiness. Hence, it also improves your credit score as credit bureaus believe in your reliability as a borrower. 

If you pay off the loan right after paying a few EMIs, the average age of your total active loan decreases. It may negatively impact your credit score in the process.

Checklist for Loan Foreclosure

Here are some things to consider before opting for personal loan foreclosure -

• Ensure that you are submitting all relevant documents; any invalid document may lead to the rejection of your application.

• Always calculate how much you will be saving by repaying the existing amount. 

• Check whether investing the amount is a better option than repaying.

• Verify the impact of foreclosure on your tax payments.

• Explore options to invest any huge amount you have. If this is financially more advantageous than opting for foreclosure, then avail that.

• Foreclosure of loans is more beneficial if availed earlier in the loan tenure as the interest liability is higher in the beginning.

It’s best to take your time and contemplate whether you are ready to opt for loan foreclosure. Not making an impulsive or hasty decision is the mantra here.