Personal Loan Foreclosure

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 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 Money View 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

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

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.

Things to Consider Before Opting for Personal Loan Foreclosure

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

In 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.

Frequently Asked Questions (FAQs)

While both these payment options are similar, there are some significant differences as well. Certain borrowers pay a part of the loan i.e., an amount that is more than the EMI. By doing so, the principal amount that is unpaid is reduced, thereby reducing the amount paid towards EMI as well. This is part-prepayment.

Foreclosure on the other hand is when borrowers repay the entire loan amount in full prior to completion of repayment tenure.

No, borrowers cannot avail part-prepayment options. However, foreclosure is allowed after a certain number of EMIs have been paid.

In case borrowers are eligible to foreclose their loan, 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. Please note that this amount can vary from one borrower to another.