Personal Loan Preclosure Procedure

Personal loans come with a set repayment term and a fixed or variable rate of interest 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 prepayment
  • Completely paying off the loan prior to the completion of the term i.e. foreclosure

What is Personal Loan Foreclosure?

Imagine a situation where an individual will come into a large sum of money and wishes to repay the entire 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. Not only will the interest liability reduce, the loan account will be closed early as well.

How is Personal Loan Foreclosure Calculated?

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 -

  • 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 more depending on the outstanding balance left before foreclosure.

There are a number of online foreclosure calculators that provide the amount of penalty that has to be paid.

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 Your Loans?

Foreclosure of loans is not a complicated process. The steps given below must be followed:

  • Borrowers must check with their lender if foreclosure is possible followed by 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 is met, they must then apply for loan foreclosure through the lending institution and provide the necessary documents
  • Once the application has been processed, the next steps will be determined by the lender. 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.

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?

In case moneyview customers wish to foreclose their loans, then the following conditions will have to be met -

Fees and Charges Amount Chargeable
Foreclosure Charges Nil but foreclosure can be done only after a minimum number of EMIs have been paid as illustrated below-
Tenure Foreclosure
Up to 6 months Not allowed
7 - 18 months Allowed after 6 EMI payments
Over 18 months Allowed after 12 EMI payments

Benefits of Foreclosing Personal Loans

Foreclosing a loan comes with a plethora of benefits including -

  • 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.
  • The biggest advantage is that borrowers can repay their loan earlier, while enjoying the benefits of reduced EMI as well as rate of interest.

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. To know more about the benefits of having a high CIBIL score.

Does the pre-closure of personal loans affect one’s 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.

The following points must be considered before loan foreclosure -

  • While foreclosure does reduce the burden of the loan, if the penalty imposed is extremely high in relation to the debt, foreclosure is not a viable idea
  • Customers should 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 if availed earlier in the loan tenure as the interest liability is higher in the beginning

Conclusion

Every option the borrower decides to avail, 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.

Personal Loan Foreclosure Related FAQ's

Foreclosure of a loan reduces the burden on the borrower by eliminating the need to pay EMI every month. This has not impact on your CIBIL score.

However, there are foreclosure charges or a penalty for paying the loan earlier. Analyze your financial situation and understand how foreclosure impacts it before proceeding.

When a borrower pays off the entire amount owed on a loan before the loan's term is up, the process is known as foreclosure. The foreclosure process enables you to pay off debt and significantly lowers your interest expenses.

You can prepay your loan through a facility provided by banks and other lenders, allowing you to do so before the loan's term has ended. This is Part-prepayment. You have the option of partially or fully prepaying the loan. It aids in lowering your overall loan balance, which lowers your interest expense and shortens the length of your loan.

Although different banks and financial institutions have different foreclosure fees, they typically range from 2% to 5% plus any applicable taxes. In order to make up for the lost interest income resulting from the early loan closure, the lender imposes this penalty.

Foreclosure charges are legal. However, not all banks charge foreclosure charges. Moreover, 

in regards to term loans with floating interest rates, the RBI ordered all non-banking finance companies to refrain from charging such foreclosure fees, particularly to individual borrowers.

Foreclosure and prepayments bring the interest down and reduce the financial burden on the borrower. They must be made if the overall amount is high and after analyzing if it will serve any benefit for the borrower. Based on this, you can choose either pre-payment or foreclosure.

However, there may be foreclosure or prepayment penalties. It is important to calculate all possibilities and take a decision based on what’s better for your financial situation.

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