Loan Foreclosure Explained: Is Paying Off Your Personal Loan Early the Right Choice?

Paying off your personal loan before its scheduled end date can reflect positively on your creditworthiness and may improve your credit score over time. However, it’s important to be aware of potential caveats, such as loan prepayment charges, different types of loan prepayments, and identifying the best time to close a loan early.

This loan prepayment guide will help you understand the implications of closing your personal loan early.

What Is Loan Foreclosure or Prepayment?

Loan foreclosure is when you repay the loan balance in one single payment instead of paying it back in multiple EMIs (Equated Monthly Instalments). While this may entail loan foreclosure fees, there are certain benefits of closing loans early, such as saving on total interest outgo and potentially improving your credit score over time.

Types of Loan Prepayment

You can foreclose your personal loan in one of the following two ways:

1. Partial Prepayment: This involves repaying a portion of the principal loan amount before the scheduled tenure. It helps reduce the overall outstanding balance, which can lead to lower EMIs or a shorter loan term.

2. Full Prepayment (Foreclosure): Full loan prepayment refers to paying off the entire outstanding loan amount before the end of the loan term, thereby eliminating any future payments.

Some lenders may only permit full prepayments. It’s advisable to check with your lender for their specific policies.

Benefits of Closing a Loan Early

Here are some benefits of early loan repayments:

• Lower Overall Interest Cost: Personal loan foreclosure helps reduce the interest paid over the loan’s tenure, especially when done during the initial years of the loan.
• Better Credit Profile: Successfully foreclosing a loan demonstrates strong repayment capacity and can improve your creditworthiness.
• Improved Financial Planning: Funds saved from EMIs can be redirected toward investments or clearing other higher-interest debts.

Drawbacks of Early Loan Closure

While there are some advantages to paying off debts early, loan foreclosures are not always the best choice. Here are some factors you should consider:

• Reduced Liquidity: Using a large portion of your savings to foreclose a loan may limit your ability to handle unforeseen financial emergencies.
• Loan Foreclosure Fees: Some lenders charge prepayment penalties, especially if the loan is closed early in the tenure. This may offset the potential benefit of interest cost savings.

Prepayment Charges for Different Loan Types

The loan prepayment charges can vary from one lender to another. Usually, foreclosure charges are structured to be a percentage of the outstanding loan amount or as a flat fee, depending on lender policies.

Best Time to Close a Loan Early

Loan foreclosure is a choice that largely depends on your financial circumstances. If you find yourself with extra funds, paying off your loan early can be a smart move. You can save considerably on the interest cost if you close the loan early in the loan tenure. However, some personal loans have lock-in periods of 6-12 months during which you cannot foreclose your loan.

How to Close Your Loan Early?

The general steps involved in the personal loan foreclosure process are as follows:

1. Review your loan agreement to understand the specific terms and conditions related to personal loan foreclosure.
2. Reach out to your lending institution to begin the foreclosure process.
3. Proceed to pay the full outstanding loan amount either online or by visiting the nearest branch. Don’t forget to account for any applicable prepayment penalties.
4. Upon successful payment, you may receive an acknowledgement receipt confirming that your loan has been closed.

Conclusion

Early loan closure requires careful consideration of your financial situation, including available savings, future financial goals, and any prepayment penalties. While the potential benefits of reduced interest costs and improved credit scores are compelling, it’s crucial to ensure you retain adequate emergency funds. Ultimately, the decision to close a loan early should be aligned with your broader financial strategy and long-term goals.

SMFG India Credit offers personal loans of up to INR 30 lakhs*, with the flexibility to make full prepayments. The prepayment charges are nominal, ranging from 0% to 7%* of the principal outstanding. Apply online today to avail of attractive interest rates starting from 13%* per annum.