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Obtaining a quick personal loan is easy. You only have to fill up your application and demonstrate your creditworthiness. Today's financial systems are the best options for borrowing money because they can design tailor-made loans for the borrower's needs and requirements.
Regardless of the circumstance, whether it be to buy vehicles or property, further education, or receive an emergency healthcare loan, personal loans are available for any situation. Personal loans have a great degree of flexibility in terms of usage, the repayment period given, and settlement, but they do not carry a lot of burdens in terms of collateral. The online world has created much competition for lending and borrowing personal loans.
Once you fill out an application, you can get personal loans within 24 to 36 hours if you have filled out the form correctly. Financial institutions or private money lenders quickly determine the loan amount you can get based on your needs and creditworthiness.
Many people decide to borrow on their own without considering the consequences. Most people also repay their loans at the first opportunity, and they have a wide range of reasons for doing so.
A pre-closure is when one decides to fully complete their loan repayment even before their due date has been reached, paying the pending sum immediately instead of making monthly payments. You can save substantial interest and EMIs by pre-closing a loan. Before signing any paper or bond with the financial companies to avail of a loan, always read the terms and conditions. It will be beneficial in the long run.
When it comes to repaying a personal loan, you aren't limited to just a single route. You may choose from several closure options that bring different benefits & considerations. However, that depends on your financial situation. Below are some ways an instant personal loan can be settled:
Pre closure of loan means clearing your loan balance in one go before the scheduled end date. This option can significantly cut down the interest you would otherwise pay over the tenure. Note that some lenders apply foreclosure penalties when the loan is closed too early. Such charges, in a few cases, are reduced or waived after a minimum number of EMIs are cleared. It is better that you check your lender's specific policy before proceeding any further.
You can continue paying monthly installments until the end of the loan term. Your account will automatically be closed without the need for additional steps after this.
Part-payment helps reduce a portion of your outstanding principal before the scheduled date. It does not completely close the loan, but lets you balance your dues. This can bring down the burden of future EMIs. But you should remember that not all lenders allow partial payments. A few only accept full repayment in addition to the applicable loan pre closure charges.
Some lenders allow you to extend your loan tenure in case you are struggling to keep up with EMIs. Such an option offers some breathing room by spreading repayments over a longer period. However, not every bank or lender offers this. The approval usually depends on the lender's decision.
You may also apply for a top-up loan rather than closing your current loan when you need more funds. It helps you borrow additional money in addition to the existing loan. This makes it simpler to cover new expenses without starting an entirely new loan process.
Your lender may need certain documents before you settle the personal loan. They may include the following –
1. Loan documents like your original loan agreement & loan sanction letter (also your EMI schedule).
2. Identity & address proof like Aadhaar card/PAN card.
3. Updated loan statement that reflects all EMIs paid up to the date of closure.
4. Payment instrument for the pending balance, often in the form of a cheque or demand draft.
Always confirm with your lender whether there are foreclosure charges or a minimum number of EMIs to be cleared before opting for the pre-closure. Keeping the requirements in mind ensures a hassle-free closure of your loan account.
Online personal loans have slightly different procedures for creating, using and disputing an account balance. As far as online loans are concerned, the amount owed is recorded in the borrower's online account, and one receives an acknowledgement once the debt is paid off. A NOC and loan closure certificate will be required to close your loan officially.
If you are looking at offline loans, you must produce all the necessary government-issued ID documents (such as government ID cards, bank account numbers, and recent electronic payments) and your current EMI and payment history.
Be ready with all the necessary documents, as the banking officials or private money lenders can ask you for additional documents during the foreclosure process. There are some financial institutions and lenders that might charge borrowers a foreclosure fee, but it is still prudent to check with the lender and receive all your questions before owing anything else to the lender.
The foreclosure process takes a certain amount of time, and only after checking and analyzing all the paperwork and documents required, the lender will validate them. After acknowledging the documents, the foreclosure process begins. Also, the financial institution will issue a letter acknowledging the foreclosure, which is a must for a borrower.
It is also vital to note that you should obtain all original documents from the lender submitted during the loan application process for them to be posted or emailed. After the loan is finished, the bank will send or publish a document indicating completion.
Before making a decision, you can use our Personal Loan Foreclosure Calculator to estimate how much you can save by closing your loan early.
Paying off a personal loan before the time might be an excellent decision in a few instances. However, it might not always be the best move for everyone. The following are some pro points to consider before deciding:
1. Lighter debt load: Pre-closure can ease your financial stress in case you have enough savings to repay the loan in full before your tenure ends. It frees you from future EMIs while managing your finances more carefully. It is better to confirm whether your bank charges a penalty for early closure.
2. Impact on credit score: Closing your loan early will not hurt your credit score. In fact, lenders see it as a sign of discipline since you have proven you can manage repayments on time. This way, you can apply for another loan later.
3. Not ideal in the final stages: Pre-closure may not give you much benefit if your loan is almost paid off. You may already have paid most of the interest amount. You can still get foreclosure fees from your lender. Running a speedy check before proceeding with this step helps you save unnecessary expenses.
4. Additional Charges & Penalty: Most banks apply a foreclosure charge. It is usually around 5% of your pending balance in addition to the applicable personal loan processing fees. The costs can reduce the advantage of closing your loan early.
Pre-closure is neither always good nor always bad. It depends on your financial condition & loan stage. You may start the process online through your lender's official portal if you think you are ready to pay your balance. You can use a loan preclosure amount calculator.
Closing your personal loan early may be a smart move. It brings various advantages that go beyond only clearing off debt. A few of them include the following –
1. Significant Savings on Interest: The biggest advantage is that pre-closure reduces your total interest payout. Paying off the loan before the tenure ends helps you avoid paying interest on the remaining months. This way, you can enjoy substantial savings.
2. A Stronger Credit Profile: Lenders view pre-closure as a positive sign of financial discipline. It reflects your ability & intent to repay loans responsibly. This further improves your chances of getting approved for future credit.
3. Reduced Debt Pressure: Paying your loan ahead of schedule means fewer financial obligations to worry about each month. It saves a portion of your income & lowers the emotional stress of being in debt.
Not sure how to calculate the pre pre-closure loan amount? Use a Personal Loan EMI Calculator for further details.
Before understanding how to calculate pre closure of a loan, you need to learn the disadvantages. Closing a personal loan early can bring peace of mind. However, it is never without drawbacks.
You need to weigh the following challenges before making such a decision -
1. Pre-Closure Fees: Lenders calculate pre closure loan amount & charge a penalty for foreclosing on a loan. It gets calculated as a percentage of the remaining balance. The charges can sometimes cancel out the savings you would have made on interest.
2. Lost Investment Opportunities: The lump sum you use to close your loan could have been invested elsewhere. You might actually be losing out financially if those investments offer better returns than the interest you save by prepaying.
3. Reduced Cash Flow: Pre-closing needs a sizable payout. This may strain your liquidity. Having less cash in hand may leave you helpless during emergencies.
Understand that loan foreclosure never affects your credit score. Once you have paid off your loan in full, your credit report will display a 'closed' status.
Before making a decision, perform a cost-benefit analysis and carefully read your loan's terms and conditions.
It may be advisable to inquire with the lender if they have not applied or included any prepayment penalties on the foreclosure amount calculation. The Reserve Bank of India released guidelines in August 2019 stating that banks and NBFCs must not charge fees for loan foreclosure or prepayment penalties for floating interest rate term loans.
Every financial institution has a different lock-in period before which the loan must be closed. The borrower may even be charged a pre-closure fee by the financial institution, which differs from one institution to the next, and it is crucial to check at the very beginning.
There are certain scenarios where pre-closing your personal loan makes clear sense. A few of the most suitable scenarios include the following –
1. When You are Still Early in the Tenure: The earlier you close a loan, the more you save on interest costs. Prepaying during the initial phase of repayment ensures you avoid a large portion of future interest. Review your loan agreement to check whether early closure is allowed. Note that a few lenders set a minimum period (such as one year) before permitting it.
2. When You Already Have a Strong Credit Profile: Early closure would not make a big difference to your credit-building journey if your credit history & score are already decent. It shows lenders that you are financially disciplined & committed to timely repayment. This itself improves your chances of getting future loans approved.
Pre-closing a loan can bring relief. However, there are times when it may not be the smartest financial decision. Consider holding your decision in the following cases –
1. If You are Trying to Build Your Credit Score: Sticking to the repayment schedule is more beneficial for new borrowers or people with a low score. Making payments on time improves your credit score. Closing the loan also reduces this & may slow down your credit-building journey.
2. When Charges are High: Much of the interest is already paid off during the later years of repayment. Pre-closure at that point would not create major savings. Adding foreclosure fees on top may make the decision less worthwhile. Doing a speedy check will give you a clearer picture of whether early closure is truly helping your finances.
If you find yourself with good finances and consider utilizing the extra cash, then it is a great idea to look for loan foreclosure even if you have time to repay all your loan amount. It is advisable to prepay your loan before the end of your tenure to enjoy some savings. Be sure to pre-close before you reach the end of your loan period. You will be provided with an opportunity to save some money. Interest rates are at their highest at the beginning of a loan period, and prepaying at the start of your tenure will provide you with more advantages than later.
Before repaying a loan amount on a foreclosure basis, do check if there is any personal loan tax benefit with this or not, even if you are losing some tax advantages with this do consult someone. Keep in mind to check whether you will save any interest on the loan by prepaying it.
You must weigh the costs involved before deciding to close your loan early. Go through your loan agreement carefully to understand the exact charges. Reach out to your lender's customer support team for clarification if anything is unclear.
The RBI stated that banks & financial institutes cannot impose prepayment or foreclosure penalties on loans taken under floating interest rates. However, lenders may levy such charges for fixed rate personal loans. Most lenders apply a lock-in period. Pre-closure during this time is not permitted.
The credit report issued by the lender after a foreclosure reflects the borrower's financial standing and stability. The credit score is used by lenders to assess creditworthiness and to determine loan parameters and conditions in the credit report. The credit report must be updated after a foreclosure to ensure the process is complete.
Closing a personal loan early can save you a considerable amount in interest payments and ease your monthly financial burden. However, it may also attract foreclosure charges depending on your lender. Always run a check before deciding if you are late in your tenure.
Most lenders allow pre closure of loan even if you have an overdraft facility linked to your personal loan. However, the process as well as charges may differ. You must check with your lender. Note that some may require complete repayment of both the outstanding loan balance as well as the overdraft simultaneously.
The penalty may vary among different lenders. It is a percentage of the outstanding loan amount between 2% & 5%. The figure depends on your lender's policies & the stage of repayment.
Pre-closure & foreclosure are essentially the same concept. It means repaying the entire outstanding loan balance before the scheduled end of the tenure. Both terms are used interchangeably by lenders. The key detail is whether the lender permits early repayment and if any foreclosure charges are applicable for doing so.
Pre closing a personal loan does not impact your credit score negatively. It may improve your profile by reducing your debt burden. But continuing EMIs may help improve your score through on time payments when you are new to credit.
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Unifinz Capital India Limited is a Non Banking Finance Company (NBFC) registered with the Reserve Bank of India (RBI). lendingplate is the brand name under which the company conducts its lending operations and specialises in meeting customer’s instant financial needs.
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