How does foreclosure impact my future borrowing ability?

Foreclosure of a loan can impact your future borrowing ability in both positive and negative ways, depending on the circumstances. Here's how:

Positive Impact:

• Improved Creditworthiness: If you foreclose your loan in India without any missed EMIs or defaults, this can reflect positively in your credit history. Agencies like CIBIL will consider this a sign of good financial management, potentially boosting your CIBIL score and making you more eligible for future loans.
• Reduced Debt Burden: Paying off your loan reduces your overall debt, improving your debt-to-income ratio. Banks and NBFCs (Non-Banking Financial Companies) in India assess this ratio when considering loan applications, so a lower debt burden increases your chances of securing new loans.

Negative Impact:

• Temporary Credit Score Drop: Foreclosure may cause a temporary dip in your credit score, especially if it involves overdue EMIs. Lenders generally rely on CIBIL and other credit bureaus to check your score, and a lower score can temporarily affect your borrowing power.
• Prepayment Penalties: Some lenders may charge penalties for early loan foreclosure.
• Shorter Credit History: Closing a loan early shortens the duration of your credit history with that particular loan. Financial institutions value long, consistent repayment histories, and a shorter credit history might impact your credit profile.

However, if the foreclosure was done prudently after building sufficient savings, it may improve the credit utilization ratio and repayment capacity. Hence, foreclosure impact on borrowing ability depends on your overall financial circumstances.