In times where you required financial assistance, you must have applied for a personal loan. Being an unsecured type of loan, it is one of the most popular forms of credit among individuals who require instant financing. A personal loan might seem like an ideal option for financing but it is still a debt that needs to be repaid by the end of the tenure of the loan. Many lending institutions allow foreclosure or pre-closure of loan, where you can repay the full amount or the outstanding loan in one single installment, before the due date mentioned in the loan agreement. All borrowers try to close their existing debts as soon as possible to enjoy a debt-free life. With a Bajaj Finance Personal Loan, you can pay the loan much before the actual loan tenure at zero foreclosure charges. Here’s a guide on foreclosure or pre-closure of a personal loan.
Types of Personal Loan Closures
- Regular Closure
This is a usual process of closing a loan as per the schedule. For example you take a personal loan for a tenure of two years. Then you repay the loan amount and the interest as fixed monthly EMIs for the whole two year period. At the end of the last EMI, your outstanding balance is zero and your loan gets closed. A regular personal loan closure has no charges applicable as the payment was made as per the schedule.
- Foreclosure or Pre Closure
Foreclosing or pre-closing a loan means when you repay the loan amount before the end of the personal loan tenure. The primary reason for foreclosing a loan is to be relieved of the debt burden. Additionally, by pre-closing the loan, you can save money on the interest charged on the loan. Generally, most lenders provide the borrower with the option to pre-close their loans after six to twelve months from the date of loan sanction. However, some lenders charge a pre-closure penalty which usually ranges from 3% to 6% of the principal amount of the loan.
When to pre-close an ongoing personal loan?
There are specific scenarios when pre-closing personal loans is a good idea. Let’s take a look at the following situations:
- Foreclose the loan early in the loan tenure
When you foreclose your loan payment in full early in the tenure, you can save on the interest charged on loan. However, most lenders do not allow pre-closure of a loan in the first six to twelve months of the tenure. If your pre-closing request gets approved, you may get charged with a foreclosure penalty fee. So, make sure to analyze and determine whether foreclosing the loan is beneficial or not.
- You have a good score and credit history
If you already have a good score, foreclosing a personal loan will not have a significantly negative impact on your credit score. Additionally, it will signal your future lenders that you are creditworthy and you are determined to repay your debts on time. Hence, having a good credit score will help you get to close your loan with ease.
When not to foreclose a personal loan?
- When you’re building your credit score or credit history
For first time borrowers repaying the loan as per the schedule set in the loan agreement will help build your credit history and score. Foreclosing your loan with a low credit score can hurt your score. Thus, it is best to avoid prepaying your loan.
- When the prepayment penalty fee is higher than your savings
Foreclosing a personal loan, especially in the latter stages of the tenure, will not help much with the savings. You will also be charged with the prepayment penalty fees. Before you foreclose your loan you need to make sure to work out the costs and benefits to decide whether prepaying the loan is a good idea at the moment.
Facts on Personal Loan Foreclosure:
- Most banks and financial institutions do not allow foreclosure on a personal loan within the first year of loan sanctioning. You get a raw deal when you realize that only a significant portion of the interest has been paid through the 12 months while the principal amount is yet to be paid. The easy way out is to prepay the amount as early as possible into the tenor, to avoid preceding savings on the interest component.
- Remember to carry your identity proof, a cheque for prepaying the balance loan and the loan account number when you approach the lender for loan foreclosure.
With personalized pre-approved offers on loans, instant approvals, and quick amount disbursal, on Finserv MARKETS, you can get the most attractive rates on loan. Their personal loan online application process requires minimal documentation, personal loan eligibility, making it an ideal choice for personal financing. You get 100% transparency and no hidden charges applicable on loan. Also, you get easy online access to your account with the Finserv MARKETS Personal Loan App.
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