There are a variety of credit and debt instruments available in the market that help people avail personal loans at lower interest rates. These personal loans can be extremely useful in times of emergency or while incurring big-ticket purchases, like buying a house or a car.
Usually, personal loans can be repaid over a period of several months using low and fixed EMIs. But, many a time, we receive bonuses from our employers or get a windfall from our family, which puts us in a position to repay the entire loan amount in a single go. What is the best way forward in this case? Should you go ahead and prepay your entire loan amount? Does your lender even have a provision for prepayment? Let’s find answers to these questions.
Preclosure of Personal Loans
What is Pre-Payment/ Foreclosure of a Personal Loan?
There are basically three ways to close (or repay) a personal loan:
- Regular closure – on-schedule repayment of the loan amount
- Part-payment – wherein you pay a part of the loan amount in one go
- Foreclosure/prepayment –prematurely repaying the loan amount before the loan tenure ends
We will focus on the third method and attempt to understand how customers can foreclose their loans.
As mentioned, prepayment or foreclosure of a personal loan is basically the process when a borrower repays the loan before the loan tenure ends. The borrower is required to pay back the principal amount in order to foreclose the loan.
While foreclosing a loan does help the borrower save a good sum of money and lower the interest rates, different lenders have varied lock-in periods before which one can close the loan and most also charge a foreclosure fee depending on when the borrower decides to pay off the loan. For instance, at PaySense, you can choose to foreclose your loan after paying three EMIs on the same. Furthermore, there is also an additional foreclosure charge of 4% that is levied on the remaining principal amount at the time of foreclosure. These numbers vary from lender-to-lender in the industry.
Thus, foreclosing a loan can be beneficial early on in the loan tenure. Make sure you calculate the benefit of foreclosing a loan before you actually do it. It is best to read the loan agreement carefully in order to understand the terms and charges of foreclosure. Consult your lender regarding any questions regarding foreclosure and decide if you want to prepay your loan only after receiving all essential information.
Things to Consider before Pre-Closing a Personal Loan
If you have the required funds, it might be natural for you to want to foreclose the loan and remove the burden of monthly EMIs to make you debt-free. However, here are a few things that you need to consider before you decide to foreclose your loan:
- Foreclosure Fee – Most lenders charge a foreclosure fee when borrowers decide to foreclose a loan. Usually, the foreclosure charges range from 2% to 6% of the outstanding principal amount that needs to be paid at the time of foreclosure. At PaySense, the foreclosure charges are 4% of the remaining loan amount.
- Lock-in Period – Most lenders have a lock-in period ranging between a few months to one year, after which a borrower is allowed to foreclose a loan.
- Remaining EMIs – You must calculate the total amount that you are liable to pay in the form of remaining EMIs (if you let the loan close naturally) and compare it with the total amount you will have to pay in case you decide to foreclose the loan. This will help you understand which method is more beneficial for you.
- Seasonal Offers – While this is rare, there are times when lenders have seasonal offers where they waive off the foreclosure fee for a limited time. Keep an eye out for such offers and increase your potential savings by foreclosing your loan during this time period.
Pros and Cons of Prepaying a Personal Loan
Repaying your loan in advance has a lot of benefits, the most important being helping you become debt free. But it also has a few disadvantages. Let us now take a look at the advantages and disadvantages of foreclosing your loan:
Pros of Foreclosing a Personal Loan
- Savings – This is one of the biggest benefits of prepaying your loan amount. A personal loan is usually available without any collateral hence the interest payable for a personal loan is generally higher than traditional loans. When you start paying your EMIs for a personal loan, you pay actually a major part of the interest initially and the principal amount reduces slowly. Hence, if you prepay your loan, it will help you save a lot of money which you could have paid as the interest.
- Freedom from Debt– Prepaying your loans makes you debt free, which is a huge morale booster. It undoubtedly brings a sense of relief, helps you take charge of your finances once again and also eases your monthly expenses by removing EMIs from them.
Cons of Foreclosing a Personal Loan
- Foreclosure charges – All lenders usually charge a foreclosure fee when foreclosing a loan. This means apart from the outstanding amount, you are also expected to pay a certain fee to foreclose your loan. If the outstanding amount is not very high then opting for foreclosing a personal loan can actually cost you more. Hence, it is advisable to foreclosure only when you are saving a substantial amount of money.
- Impact on credit score – When you pay your monthly EMIs on time, it has a positive impact on your credit score. However, in some cases, prepaying a loan, along with other factors, might indirectly result in a negative impact on your credit score.
What is the Foreclosure Process?
If you have the requisite amount and wish to foreclose your personal loan, you must follow the following foreclosure process:
- Contact your lender – First, the borrower needs to get in touch with his/her lender and generally, write an application, expressing his/her desire to foreclosure the loan. The existing loan account number must be mentioned in the application, alongside all other essential customer details.
- Payment of the principal amount – Once the lender receives the application, it calculates the amount outstanding after taking into consideration the interest paid so far and also the date of foreclosure. You are then communicated the date of foreclosure and are required to pay the amount by the said date. The foreclosure charges are added while making the foreclosure payment.
- Collect the no dues certificate – Make sure you collect a no-dues certificate (or NOC) from your lender stating that all amount is cleared and nothing is due. The certificate must also include all other important customer information.
Other FAQs about Prepayment of Personal Loans
- How do I know what the foreclosure charges are?
Banks and other financial institutions usually levy a foreclosure fee between 2% and 6%, depending on the loan tenure and other factors. These charges and lock-in period are also clearly stated in the loan agreement. PaySense charges a 4% foreclosure fee on the outstanding loan amount during foreclosure.
- Can I foreclose my personal loan within three months at PaySense?
Yes, unlike most banks and lenders, you should have successfully paid a minimum of 3 EMIs in order to foreclosure you loan at PaySense. Usually, banks have a lock-in period ranging from 6 months to a few years, depending on the loan amount and the loan tenure.
- What if I receive a bonus at work but it isn’t enough to repay the entire amount?
In case you want to repay a part of your loan amount with your current bonus, check with your lender if they allow part-payment options. Simply put, this means that you can pay a part of your outstanding loan amount. This will help you reduce the future EMIs and the loan tenure, thus, helping you save money. However, not all lenders offer this option.
- Why does the prepayment of a loan evoke a foreclosure fee?
When a lender offers you a loan amount, they take into account the interest you will pay on the same while managing their assets. When you foreclose a loan, banks are unable to receive the entire interest amount, as they intended, which negatively impacts their asset and liability management. To compensate for that loss, banks charge a foreclosure fee when you prepay your loan.
- What do I have to do to foreclose a loan?
To prepay your loan, you need to get in touch with your lender and submit an application of foreclosure, get the application approved, and then pay the principal amount. If you want to know the prepayment process at PaySense, please get in touch with us at [email protected]
Thus, there are several factors that you should consider before prepaying your personal loan. Make sure you work out the benefits of foreclosing it before actually doing it and that you are eligible to prepay the same. Read the foreclosure terms before signing the loan agreement and whenever in doubt, get in touch with your lender for clarifications. Depending on how far along you are in your loan tenure, foreclosing it can help you save money, or lose it – so take the right call.
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