You found yourself in a situation in life that demanded an immediate influx of money. You are budgeted, and have a fixed income. What do you do? You get yourself a personal loan.
Whatever may be the need or situation, be it specific objectives such as buying vehicles or property, or loans to continue further education or an emergency healthcare loan, or even a holiday loan – no matter what the situation, personal loans are available for all kinds of situations in life.
Personal loans are great and offer amazing elasticity in terms of usage, tenure and settlement. they do not have the baggage of pledging any of your collateral before getting a loan. Of course, the lending rules and conditions differ from lender to lender, and the online space has made getting loans a competitive space.
You can now avail loans in a matter of 24 to 36 hours, if you are quick to fill up your application and prove your credit worthiness. FinTechs are the best bet today when it comes to availing personal loans because they can tailor schemes to suit the borrowers’ needs and requirements.
Things To Know Before Closing Your Personal Loan
Usually, personal loans are taken over a short tenure; for a shorter period of time, say 60 months. When you do this entire process online, you can choose your loan and most lenders are quite lenient with terms of prepayment. In case at any given point of time, you do find yourself with surplus money, you can then make use of the funds to pre-close or prepay the outstanding personal loan. There are key advantages of pre-closing your personal loan.
What is a Pre-Closure?
A lot of people are varied in opting for loans, and yet when life throws a twister at them, opting for a personal loan deems fit for those situations. Many borrowers prefer to repay their loans at the earliest. So, a pre-closure or foreclosure is just that; the complete repayment of your loan in a single instalment before the due date. That is, paying the pending amount in one shot instead of paying monthly installments (EMIs).
Pre-closures do help you save a significant amount on the interest and EMIs that one would have to pay over the entire tenure of the loan.
However, prepayment does come with minimal charges, so it is always a good idea to read the terms and conditions carefully before deciding for closure.
Is It a Good Idea to Close Your Personal Loans Early?
As mentioned above, it may cost you some charges, but minimal. Also, terms and conditions vary from lender to lender and even online and offline loans have different terms and conditions.
Online personal loans and offline loans have slightly different procedures to follow. As far as online loans are concerned, the outstanding is reflected in your online account and one gets an acknowledgement as soon as the dues are cleared. NOC and a loan closure certificate will be the final documents that you need to ensure your loan foreclosure process is complete.
But if it is offline loans, then you definitely must carry all the documents that are required for validation of your identity, such as government identity proofs, your loan account number, bank statements showing your last cleared EMI and cheque or demand draft of the pending loan amount.
The bank or financial institution may request additional documents that they may deem fit for completing the process. Some financial institutions may even charge you a nominal fee for foreclosure. It would only be good sense to check with the lender and clear all your doubts to ensure you do not owe anything else to the lender.
Once all the necessary documents have been furnished by the borrower and validated by the lender, the financial institution will issue a letter acknowledging the foreclosure, that one must procure and keep for all future transactions or reference.
Also, a crucial thing to remember will be to get back all original documents form the lender that were submitted while applying for a loan. Once the entire process is complete, the bank will either post or email a document stating the completion of the loan.
Does Pre-Closure Affect Your Credit Score?
No. Pre-closure is basically repayment of your loan before the due date. It definitely has no bearing on your credit score. Once you have repaid your loan in full, your credit report will reflect a ‘closed’ status.
Do You Have to Pay for Pre-closures?
It is always important to do a cost-benefit analysis before you make a decision and read the terms and conditions of your lender carefully.
It would be prudent to check with the lender if they have not added any or included any prepayment penalties on the foreclosure amount calculation. Borrowers need to know that since August 2019, as per a Reserve Bank of India (RBI) guideline, banks and non-banking financial companies (NBFCs) have to stop or do away with the foreclosure or prepayment penalty charges, for floating interest rate term loans, for purposes other than business.
Every financial institution will have different lock-in periods before which it is advised to close the loan. The borrower may even be charged a pre-closure fee by the financial institution, that differs from one institution to the other, and it is advisable to check at the very outset.
When Is It a Good Time To Pay Off Debt?
If you find yourself with excess funds and you still have some time before you can repay all your loan amount, then it might be a good idea to pre-close.
Pre-close before you are near the end of your loan tenure. That will give you an opportunity to enjoy some savings. Remember that interest rate is highest at the beginning of a loan tenure, and hence there are more benefits if you prepay at the start of the tenure than later.
Before you foreclose, it might be a good idea to check if you will lose any tax benefits that you may lose by doing this. Keep in mind to check the tax rebate that you are availing from the home loan is more or less from the interest load you will save by prepayment of the loan.
Bottom Line
Once the borrower has completed the foreclosure process, the lender will issue a credit report that is a mirror of one’s financial status and stability. It is this credit score that lenders use to assess creditworthiness and determine loan terms and conditions.
After the foreclosure, the lender will have to update the credit report to CIBIL where all credit records and statements are maintained. This is a crucial step to ensure the process is complete.
