Thinking Of Closing Loan Ahead Of Time? Should you do that?

Loan foreclosure is called to repay your outstanding loan amount before the due date. Generally, personal loans have a lock period of one year, only after which the entire outstanding amount can be repaid. Personal loans can be repaid either prematurely or little by little.

Part payment

When the customer has some amount left, which is not equal to the entire principal amount, it is called part payment. That means repaying some part of the loan amount. how does it work? This reduces the principal amount paid, which also reduces your EMI and interest. It is important to know that this will work only when you pay a significant amount as part payment. Foreclosing or pre-closing of the loan can be either from the customer or from the bank.

Foreclosing from bank

This happens only when the customer does not pay EMIs as a regular amount. After this, the bank has to auction the property for which it has taken a loan. The bank forecloses the loan from the money received by auctioning the property. Because the customer does not have the money to repay the loan amount.

Foreclosure from customer

In most cases, people terminate the loan prematurely to become debt free. But this may prove to be a bad decision. Therefore, before making the loan foreclosure, carefully check the terms and conditions of the bank.

– Is it possible to get loan foreclosure? Not all banks agree to get loan foreclosure before the due date.

– What are foreclosure charges? For most loans (except home loans) you have to pay some pre-closing charges. Foreclosing charges can range from 3 to 6 percent of the principal amount to be repaid.

– When can you foreclose the loan? Every personal loan can usually be foreclosed only after paying 1 year EMI.

As stated earlier, most banks do not allow customers to close the loan within 6-12 months from the first month of the loan i.e. from the date of loan commencement. As long as you pay 12 months EMI, you can pay a significant portion of the interest amount and very little savings are spent on the loan’s principal amount.

Therefore, the trick is that the entire amount should be repaid in advance of the loan period as early as possible so that the customer has to pay less charges on interest. But if the customer has paid most of the interest in several months and has extra cash, then repay the loan ahead of time and throw the burden of debt off your shoulders.

RBI recently directed banks not to collect pre-closing charges from customers. But this will apply only to those loans which have been taken at ‘floating rate of interest’. Since most of the personal loans are taken at a fixed rate, this rule does not apply there. But there are many public and private sector banks, which do not charge pre-payment charges. In such cases, customers benefit greatly. He can use this money to repay the loan. If the money you have is giving you less returns then why are you running the loan whereas when you can invest it elsewhere than the interest given on the personal loan, then repaying your personal loan ahead of time is more wise to.

When you go for pre-closure of personal loan then take some documents like ID proof, DD / check for pre-closure, loan account number.

Pre-closure slip

– When you make a payment, you must get a receipt for pre-closure. Avoid giving cash to pre-close.

– If your next EMI is near, then the amount may be deducted from your account. But make sure that the bank credits it back to your account.

Within two weeks, you should get the information about the pre-closure of the personal loan.

Benefits of personal loan foreclosure


The biggest benefit of foreclosing a personal loan is that it saves you. Whenever you go to foreclose a personal loan, it definitely saves some money.

Nothing is required to be guaranteed as a personal loan. But its interest rate is much higher than other loans. It starts at a minimum of 15 percent annually. When you start repaying the EMI, you pay a larger share of the interest and the resulting principal amount gradually decreases. So if you want to foreclose the loan in advance, then it will give you a lot of savings, which you could pay on interest.

Boosts morale

The end of the loan has a psychological effect on the customer. This is a relief for the customer and closing a high interest rate loan surely boosts morale. By finishing the loan, you get the confidence to become financially strong and also the satisfaction.

Loss of foreclosure of personal loan

Breaker can be made for other occasions

Foreclosing a personal loan means that you have to pay the entire amount in one go. It requires a lot of money and it can cause damage on other occasions. It is better to foreclose the loan that you can use that money in other things like investment, so that you get better results in future. Or you can also save it for higher education of children.

Foreclosure charges

Apart from the outstanding balance, you have to pay foreclosure charges on repaying personal loan ahead of time. These charges play an important role in deciding whether you should foreclose or not. If your outstanding balance is not very high, then choosing foreclosing can cost you dearly. So you should do foreclosure only if your savings on foreclosure are a good amount, which includes the cost of foreclosure fees.

Effect on CIBIL Score

If you make payments on time, then your CIBIL score has a positive effect. At the same time, foreclosure of personal loan can cause your CIBIL score to fall. So you should not forget that in future also you may need a loan, so foreclosure of loan can affect your CIBIL and also on reliability.

Lock in period

Depending on the terms and conditions, you cannot foreclose the loan under the lock in period clause. So before reaching the final result, know about this from your lender.

Would like to end this article with a saying that as little as possible, borrow as much and repay it as soon as possible. This is true for personal loans because having high interest rates makes it difficult for many people to repay the loan. So if you can repay some part of the loan then do it without thinking anything.

Leave a comment