Personal Loan Foreclosure: From benefits to charges; all you need to know

Personal loans have become a popular choice amongst people for getting quick cash to cover an emergency or a vacation. These loans offer fast loan disbursement and offer flexible repayment tenures. If you do not wish to wait until your last due date of the loan repayment, you can even choose to prepay the loan. However, it's important to be aware that prepaying your loan might incur foreclosure charges. Let’s dive deeper into what foreclosure entails.

Personal loan foreclosure

Personal loan foreclosure is the process, which occurs when the borrower wants to pay off the personal loan balance before the end date of the loan tenure. This is an option you can consider if you want to reduce your financial burden and avoid future EMI payments. However, foreclosure attracts some charges known as foreclosure charges which are usually charged to compensate the lender for the interest charge.

Benefits for foreclosing personal loan

Interest savings: By foreclosing the loan you can reduce the overall interest paid on the loan. This is a great option if you want to foreclose the loan during the early stage of the loan when the interest is higher.

Improved financial freedom: Personal loan foreclosure can help you get rid of the repayment faster through which you can focus on your other financial commitments without worrying about EMIs anymore.

Improved credit score: By foreclosing the personal loan, you can improve your credit utilisation ratio. As a result, your credit score will also gradually increase.

Key factors to consider while foreclosing personal loan

Foreclosure charges: Before you opt for foreclosure, you must check the foreclosure charges which you would be bound to pay.

Lock in period: Many lenders specify a lock in period as part of your personal loan repayment during which you can not choose to foreclose the loan. This period varies depending on the lender’s policies.

Penalty free period: Many lenders do not charge any foreclosure charges after a given period. This period usually refers to when you apply for foreclosure towards the end of the loan tenure.

Foreclosure vs. prepayment

Personal loan foreclosure refers to when prepay the entire remaining balance of the loan in one go. This way you clear your personal loan entirely without any remaining balance or interest.

On the other hand, prepayment of loan refers to when you prepay your remaining balance partially. This reduces your remaining liability of the loan, but does not completely eliminate it. Prepayment and foreclosure may help you improve your credit score gradually.

In conclusion, before you choose for a personal loan foreclosure, you may want to consider the charges against the interest savings to understand whether a foreclosure is really worth it or not. You must also understand that personal loans have a higher interest rate as compared to other loans in the market. Hence, if you have not yet taken a personal loan and are still open to different options, you may explore other options and compare the best option which suits your budget.

(Note: Raising a loan comes with its own risks. So, due caution is advised)