A commonly asked question among borrowers is whether there are any foreclosure charges associated with their borrowing. Let us first understand what loan foreclosure is; it is the repaying the entire amount due in a single payment instead of repaying the borrowed amount in EMIs as per the original agreement. Let us understand this question in detail.
Everything You Need to Know About Foreclosure Charges
How Much are Foreclosure Charges?
Loan closing charges depend on the outstanding principal amount and the remaining tenure. Typically, the greater the principal amount and the remaining tenure, the higher are the loan closure charges. With Shriram Finance, foreclosure charges are between 3% and 6%.
Is There a Lock-in Period before Closure?
All lenders have a lock-in period before allowing the borrowers to close the close. With Shriram Finance, customers can opt for closure any time after the first 6 months. After paying their 6th monthly instalment, borrowers become eligible to pay off their dues.
How is Foreclosure Different from Prepayment?
Prepayment refers to a partial payment of the amount due. Suppose you have a loan of INR 10 lacs and you decide to pay INR 5 lacs after 10 months, you still owe the remaining amount to the bank. Prepayment reduces the total outstanding amount due. Borrowers can benefit from the reduced outstanding amount in two ways:
1. By reducing their monthly EMI
2. By reducing the tenor.
However, in the case of a foreclosure, the entire amount due is repaid, and you no longer owe any money to the bank.
What are the Legal Rules Around These Charges?
Most people want to know whether banks are allowed to charge for the premature closing of a loan. The Reserve Bank of India (RBI) has barred non-banking finance companies from charging these charges on individuals’ loans. This restriction applies to borrowings, such as mortgages. However, RBI has allowed banks and NBFCs to charge penalties on the closing of business and personal loans.
Why do I Have to Pay Charges?
When lenders give a business credit, they expect to earn a certain interest on their principal. Remember, lenders have individual costs associated with raising and disbursing funds, and they expect a certain amount of compensation in return. A foreclosure affects the amount of income they are hoping to earn on their principal. A penalty helps them offset some of the lost interest income due to the agreement’s premature closing.
Does foreclosure Affect a Borrower’s Credit Ratings?
Yes, it can positively affect the borrower’s credit ratings.
Anything Else I Should Know?
Borrowers should consider the following before opting for a closure:
- Foreclosure amount.
- Their source of funds for repayment - They should ensure they are not borrowing at a higher interest than the interest payable on their current borrowing.
- The lock-in period before which you cannot close your amount due - In the case of Shriram Finance, the lock-in period is the first 6 months of disbursement.
Calculating Foreclosure Charges: An Example
These charges are calculated based on the following information:
- Total amount due
- Pending amount
- Rate of interest
- Number of EMIs already paid
- Foreclosure month or the month in which the account is closed
- Any additional charges
Let us understand this with an example. Note that the numbers are only for illustrative purposes. Contact Shriram Finance to know the exact charges.
You have taken a business loan of INR 20,00,000 for 36 months at an interest rate of 15%. After paying 8 EMIs, you decide to opt for closure. In this case, your foreclosure month is the 9th month.
Here are how your charges will look like:
Foreclosure details are the amount you will have to pay to close your loan. In this case, the amount works out to around INR 14,21,737. This amount also includes the additional charges related to the closure. Since you have already been paying EMIs for 8 months, your liability has been reduced.
In this process, you will save 87% of the interest payable during the tenor. If you had not opted for closure, you would have paid interest over the entire life of the loan. Since you have decided for closure in the 9th month, this amount reflects the interest saved for the remaining 27 months (36-9 = 27). You have already paid EMI for 8 months, and thus you have already paid 13% of the total interest due on this borrowed amount.
The foreclosure amount is the amount you are repaying in total. This includes the amount included in details (INR 14,24,737) plus the interest and principal you have already paid for the first 8 months.
Foreclosure Charges with Shriram Finance
With Shriram Finance, foreclosure charges are between 3% and 6%. Here are the steps involved in knowing the exact charges and foreclosing the loan.
Find Your Nearest Branch:
Closing a loan involves the physical submission of documents and thus cannot be done online. The first step is to find the nearest branch of Shriram Finance. You can find the branch by clicking on the locate us option.
Once you are on this page, you can locate your nearest branch based on your locality’s postcode or your state and your city.
Make an Application
Once you visit the branch, you need to submit a written application for loan foreclosure. The officials will give you a timeline by finding the exact charges on your amount due and the total repayment amount.
Submit the Necessary Documents
You will need to submit the documents required by the bank. You should check the exact requirement of documents in your branch, but here are some commonly required documents:
- Proof of identity (e.g., PAN card, Aadhar card, passport or driving license)
- Related documents (e.g., loan agreement)
- Details of your account with Shriram Finance (e.g., loan account number)
- Latest bank statements of the account used for paying EMI. This serves as proof of paying the last EMI and that it has been cleared from your bank
Paying the Required Amount
You should check the amount payable for foreclosure. The amount shared by the bank will also include the additional charges. Once you know the amount, you can pay the amount through cheque or online transfer.
Receiving Closing Documents
Once the bank receives the amount from you, they will complete any foreclosure formalities. These will include providing documents such as:
- An acknowledgment letter
- A loan closure certificate
- A certificate confirming you no longer owe anything to the bank
Business Loans from Shriram Finance
Shriram Finance is India’s leading NBFC with a legacy of 43 years.Over the years, many micro, small, and medium enterprise businesses have benefited from Shriram Finance’s business loans. Businesses have availed funds for diverse needs such as investing in infrastructure, machinery, equipment, and other requirements related to growing their business. With a network of 3600+ branches all over the country, Shriram Finance business loans can be availed easily at your doorstep.