The longer the repayment term, the lower the EMI amount, which helps reduce the financial burden. However, this also results in the borrower having to pay a higher rate of interest overall.
Therefore, certain borrowers opt to close the loan through a lump sum payment after a few EMIs, if they can afford to. This process is called foreclosure of a personal loan or loan foreclosure.
Imagine a situation where an individual wishes to repay the entire amount of a loan before the completion of the repayment term. This is known as loan foreclosure, loan pre-closure, or loan prepayment.
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.
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 before foreclosure, and the lender’s rules.
Several online foreclosure calculators can calculate the penalty that has to be paid.
Foreclosure of loans is not a complicated process. You can follow thes 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 alloted or any other option through which you will be able 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.
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 -
|
Tenure |
Foreclosure |
|
Up to 6 months |
Not allowed |
|
7 - 18 months |
Allowed after 6 EMI payments |
|
Over 18 months |
Allowed after 12 EMI payments |
Here are some other important points related to loan foreclosures on the Moneyview 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 foreclosures might seem like an attractive option in some cases. Let’s look into some of the benefits of loan foreclosure -
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.
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.
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 foreclosures also have some disadvantages associated with them. Let’s look at a few of the cons -
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.
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.
Though RBI has asked banks not 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.
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 the age of your loan and credit card accounts. 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 and credit card accounts decreases. It may negatively impact your credit score in the process.
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.
Paying off your loan in lumpsum before your repayment tenure is over is referred to as loan foreclosure. While foreclosure does come with a multitude of benefits, you should read and understand the fine print.
Consider a loan foreclosure only after a good number of EMIs have been paid such as for 6 to 12 months. In that case, the EMIs you paid will help boost your credit score and the loss incurred by the lender will not be as high. You will also have to pay lower penalties in such a case.
Want to take a personal loan with flexible repayment terms and no foreclosure penalty? Visit the Moneyview website or download the app to apply.
Before foreclosure is permitted, there may be a minimum loan period that you must finish paying for. This differs depending on the lender, so make sure you review your loan agreement or get in touch with them.
Both foreclosures 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 the analysis, 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.
Although different banks and financial institutions have different foreclosure fees, they typically range from 1% 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.
Depending on the terms of the loan or your relationship with the bank, some might remove this charge.
This can be done by visiting a branch or submitting an online request. Provide your loan account details and the calculated foreclosure amount to the lender to start the procedure.
Once you initiate a foreclosure, the lender will calculate the final foreclosure amount, including any applicable charges. Once you confirm the amount and make the payment, your loan account will be closed, and you'll receive a written confirmation.
Foreclosure refers to paying off the entire remaining loan balance at once. Partial payment allows you to pay a lump sum towards your principal amount, reducing your overall loan balance but still requiring future EMI payments.
Paying less in interest down the road is one benefit of foreclosure. Analyze your financial situation and understand how foreclosure impacts it before proceeding. For personalized assistance, speak with a financial expert.
Yes, foreclosure charges are legal. However, not all banks charge foreclosure charges. The RBI has ordered all non-banking finance companies to refrain from charging foreclosure fees for loans with floating interest rates.
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