Foreclosure of loans: How it can be disadvantageous for you?

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Foreclosure of loans: How it can be disadvantageous for you?
Loan foreclosure is the facility provided by banks that allows borrowers to close the loan account even before the loan repayment period with some pre-payment charges. In case a person realizes some easy cash or has sufficient liquidity to close the loan account, he shall definitely ought to do so to get rid of debt at the earliest.

Furthermore, often people view as having a loan account as detrimental for the credit score which is computed by the credit reporting agencies using the record of the different loan account maintained by the concern. The credit score by and large informs or is indicative of an individual's credit behaviour and loan repayment standing in the market.

But does maintaining a loan account even in the case when one has liquidity to close the account before the loan repayment period makes sense? Yes, it does make sense. Though, it may sound bizarre as paying off interest and principal amount until the maturity shall entail a rather higher cost as compared to the total outstanding amount together with the pre-payment charges on foreclosure. However, despite this in many a cases a loan borrower should not resort to foreclosure so as to maintain a good credit history and for credit reporting agencies to adjudge the individual to be financially responsible. Know about other ways to improve your credit score.

The tenet so as to continue to maintain the loan account even in the case when one is financially in a position to close it holds good or shall serve well when there are chances that an individual may place another loan request with the financial institution.

Maintaining loan account through the loan repayment term with timely discharge of liability as full EMI payment on a regular basis shall improve both the credit record and credit report of an individual. In fact, it is the sole criteria on the basis of which financial institutions determine your loan repayment capability. So, while you maintain the loan account and pay-off the dues in time, your credit score and credit history over the time gets improved. In the other case, when you foreclose the loan account prior to the loan repayment period, credit reporting institutions may interpret it against you and your credit score and credit history can be be put at a disadvantage.

Story first published: Monday, January 20, 2014, 11:57 [IST]
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