One of the most popular financial products, a personal loan is perennially in demand primarily because it is easily accessible and allows you flexibility to utilize the amount as you please. However, if your financial situation suddenly takes a turn for the better or you simply feel that paying off your debt earlier than the deadline would be liberating, you may choose to foreclose the loan.
What is Foreclosure?
Loan foreclosure refers to complete repayment of the outstanding loan amount in one single payment prior to the due date specified in the loan agreement instead of in multiple Equated Monthly Instalments (EMIs). But while most people who opt for loan foreclosure typically let the interest rate become the sole deciding factor, it is important to be familiar with the larger picture so as to make a decision that will fit your needs. Before you make a decision, here’s everything you need to learn about the pros and cons of early closure of a personal loan.
Advantages of Foreclosure
1. Freedom from Debt
This is the most obvious advantage of foreclosing a loan. It means being able to lead a debt-free life, free of the stress of having to make EMI payments all through the loan tenure.
2. Saving on Interest Amount
If you have sufficient funds at your disposal, it is better to repay your personal loan in its entirety in the earlier years of the loan tenure itself. This helps in saving a substantial interest amount.
3. Improved Credit Score
A credit report with a clean loan repayment record can really boost your credit score. A better credit score brightens your chances of obtaining another loan on more favourable terms from the lender.
Disadvantages of Foreclosure
1. Prepayment Charges
You are liable to pay prepayment charges when you repay the loan before the stipulated end of the loan tenure. The prepayment penalty varies across banks, with some charging up to 5 per cent of the principal outstanding amount and others levying nothing at all.
2. Loss of Liquidity
Having surplus funds is always a boon that helps you meet immediate needs and minor emergencies. Using this extra cash to make a prepayment is not a wise idea unless you have money to spare after taking into consideration crucial investments and monthly contributions towards long-term financial goals. You could also invest the extra funds in a financial product that offers satisfactory rates of return.
To Foreclose, Or Not to Foreclose?
All the aforementioned factors must be taken into account before you make a decision to foreclose your loan. In case your credit institution imposes penalty for pre-payment, it is imperative to compare the amount you will save on interest with the charges of pre-payment before proceeding.
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