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A Comprehensive Guide on Preclosure of Personal Loans in India

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Personal loans have become a popular way to finance various needs, including medical expenses, education, home renovation or even a dream vacation. As per the recent RBI Press Release, the growth rate of personal loans in India increased to 20.4% (year-on-year) in January 2023 from 12.8% in the previous year. However, circumstances may change and borrowers may find themselves in a position where they can repay the loan in full before the loan tenure ends. This is where personal loan foreclosure comes into play.

In India, personal loan foreclosure can be a wise decision for borrowers who want to save on interest and reduce their financial burden, but it can also come with penalties and charges. In this guide, we'll explain everything you need to know about the foreclosure of personal loans in India, including how it works, the pros and cons and the charges involved.

What is Personal Loan Preclosure?

Personal Loan Preclosure refers to the process of paying off the loan before the end of its term. It is also known as foreclosure. If you have taken Shriram Personal Loan for a specific duration, let's say three years and you pay off the entire outstanding amount before the end of the third year, you are preclosing the loan. Often individuals get confused between the terms: prepayment and preclosure of loans. Here is a Loan Prepayment Vs Loan Foreclosure table for a better understanding.

Loan PrepaymentLoan Foreclosure
Loan prepayment means paying off a part of the outstanding loan amount before the due date.Loan foreclosure means paying off the entire outstanding loan amount before the end of the loan term.
The borrower can opt for partial prepayment or complete prepayment of the loan.Foreclosure can be initiated by the lending institution or the borrower. If the borrower initiates foreclosure, they will need to pay foreclosure charges and any other applicable penalties. 
If the Bank/NBFC initiates foreclosure, they will auction off the collateral to recover the outstanding loan amount.

Key Highlights

  • In India, personal loan foreclosure can be a wise decision for borrowers who want to save on interest and reduce their financial burden, but it can also come with penalties and charges.
  • Before you decide to preclose your loan, it's important to review the terms and conditions of your loan agreement.
  • The settlement amount includes the outstanding principal amount, any interest due until the foreclosure date and foreclosure charges (if applicable).
  • Make sure to collect the No Objection Certificate document from your lending institution, as it serves as proof of foreclosure.

Why Opt for Preclosure of Personal Loans?

There are several reasons why someone may want to preclose their personal loan:

  • To save on interest: Unsecured personal loans usually come with high-interest rates compared to other loans such as home loans or car loans. If you foreclose a loan, you can save a significant amount of money on the interest payments that would have accumulated over the remaining term of the loan.
  • To reduce debt burden: If you have multiple loans or debts, foreclosing a loan can help reduce your overall debt burden and improve your financial health.

Quick Facts

"As per RBI guidelines, prepayment fees cannot be charged by any lender on floating rate personal loans."

Steps to be taken for Foreclosing a Personal Loan in India

Check the terms and conditions:

Before you decide to preclose your Shriram Personal Loan, it's important to review the terms and conditions of your loan agreement. Look for any clauses that mention foreclosure charges, minimum lock-in periods or other fees associated with preclosure.

Determine the outstanding amount:

Contact the lender to determine the outstanding amount on your loan, including the principal amount, any accrued interest charges or fees.

Calculate the settlement amount:

Once you have determined the outstanding amount, calculate the settlement amount by adding any prepayment charges or fees that may apply. Notify your lender:

It is mandatory to notify your lender in writing regarding the foreclosure. This can be done through a letter, email or by visiting the lender in person.

Arrange for payment:

After notifying your lender, arrange for payment of the settlement amount. This can be done through a cheque, online transfer or demand draft. Make sure that you have sufficient funds in your account to cover the payment.

Collect the No Objection Certificate (NOC):

After the payment is completed, your lender will issue a No Objection Certificate (NOC) stating that your loan has been fully repaid. Make sure to collect this document from your lender, as it serves as proof of preclosure.

Update your credit report:

Make sure to update your credit report with the credit bureau after preclosing your personal loan. This will ensure that your credit score reflects the fact that you have repaid your loan in full, which can improve your creditworthiness and help you secure loans or credit cards in the future at better interest rates.

What are the Terms and Conditions for Foreclosure of Personal Loans in India?

Before you foreclose your personal loan, it's important to understand the terms and conditions associated with it. Here are some of the key things to keep in mind:

  • Foreclosure charges: Banks and NBFCs in India may levy foreclosure charges if you preclose a personal loan before the end of its term. These charges are typically a percentage of the outstanding loan amount and it varies from one lending institution to another.
  • Minimum lock-in period: Most banks and financial institutions in India have a minimum lock-in period before which you cannot preclose your personal loan. This period can range from six months to one year.
  • Notification to lender: If you plan to foreclose Shriram Personal Loan, you must notify the lender in advance. This is to ensure that they can provide you with an accurate settlement amount to avoid any confusion or delays in the foreclosure process.
  • Settlement amount: The settlement amount is the total amount you need to pay to preclose your personal loan. It includes the outstanding principal amount, any interest due until the preclosure date and prepayment charges (if applicable).

In conclusion, foreclosure of personal loans in India can be a smart financial decision for some borrowers, but it's not a one-size-fits-all solution. Before deciding to pay off your loan early, it's important to consider factors such as pre-closure charges, pre-payment penalties and your overall financial situation. By doing so, you can make an informed decision about whether pre-closure is the right choice for you. Check out Shriram Personal Loan for all your immediate financial requirements on the go.

FAQs

1.Does foreclosure of a personal loan affect my credit score?

It is necessary to update your credit score with the credit bureau. Repaying your loan in full will improve your creditworthiness, enabling you to obtain loans or credit cards more quickly in the future. But failing to inform the credit bureau can negatively impact your credit score and hamper your chances of building a good credit history.

2.What are preclosure charges as per RBI guidelines for personal loans?

RBI has prohibited all lenders from charging prepayment fees on floating interest rate personal loans. In contrast, borrowers who take out fixed-rate personal loans are not subject to such restrictions. A personal loan foreclosure charge on the outstanding principal amount varies across the lending institutions.

3.Is it good to foreclose a personal loan?

A pre-closure saves you a significant amount on interest and EMI payments that you would have to make over the life of the loan. Nevertheless, prepayment does come with minimal charges, so it's always a good idea to read the terms carefully before closing.

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