Planning To Close Your Loan Early? Know These 5 Things About Loan Foreclosure First

A personal loan can be a saviour during unprecedented financial needs and requirements of money for various needs, including buying a car, home renovation, funding child education, etc. Many people who take loans in case of an emergency prefer to repay the amount as quickly as possible.

The process of repaying a loan before its tenure is known as loan foreclosure. Sometimes, it is also termed as loan pre-closure. Loan foreclosure comes with its pros and cons, which people must know.

Understanding Loan Foreclosure

Whenever, a person applies for a personal loan, housing loan or even a car loan, the financial institution fixes EMI rate and the loan tenure based on the approved loan amount. EMI and loan tenure is also based on the down payment made by the borrower while applying for loan. Generally, there is no down payment when applying for a personal loan.

A down payment is the initial or upfront position of the loan amount people pay while applying for a loan to purchase a high-value asset like a car, house, etc. People pay down payments out of pocket when taking out loans. The remaining amount to borrow the asset is financed through a loan. Now, if the borrower repays the loan amount before the completion of the loan tenure, then it is called as loan foreclosure or pre-closure.

5 Things To Know About Loan Foreclosure

Loan foreclosure comes with its pros and cons, and it is always wise to consider all the aspects about the process before opting it to complete your loan before time. Here are five important things you must know about loan foreclosure.

Credit Score

The credit score, also known as the cibil score of a borrower or an individual, represents that person's creditworthiness. A higher credit score indicates that the person is in better position to manage debt and is likely to repay the borrowed amount on time. Settling a loan where there were some overdue EMIs can temporarily reduce your credit score. However, a loan foreclosure is unlikely to impact your credit score.

Better Savings

Paying off loan earlier can help borrowers in saving big on their interest rates, especially if they have a pending loan tenure of four to five years, or more. In this case, people can consider repaying their loans in advance and avoid paying interest rates in long run. Repaying loan also enables them to revive the scope of opting for a personal loan in future in case of a financial emergency.

Foreclosure Charges

While repaying loans before the completion of tenure is a favourable option for those who are planning to save on interest, they may have to pay some penalty or extra charge for closing the loan early. Different banks and institutions charge differently on loan-foreclosures.

Check Your Savings

Repaying loans might be suitable for people advocating for mentality on the lines of Indian adage, 'Na karj le, na karj de'. However, loan foreclosure at the expense of your savings and unavoidable expenses might put you in a difficult situation.

Tax benefits

Continuing home loans and even personal loans can benefit Indian citizens who are paying taxes under the old income tax regime. Home loan borrowers can claim tax benefits under certain sections of the Income Tax act. According to website clear tax, individuals can also avail benefits on tax from their personal loans in special cases. If the personal loan is taken for purposes like home renovation, funding child's education, starting a business, then individuals can claim tax benefits under old income tax regime.