A Personal Loan is repaid in easy monthly installments for a specific tenure. In the loan agreement, the lender and the borrower agree on points such as: loan tenure, interest rate, and installment payment date. Post signing off, the loan is disbursed.
The bank allows personal loan foreclosure or pre-closure only after the lock-in period is over; usually, the lock-in period is for 12 months.
What is loan foreclosure?
Personal loan foreclosure involves repaying the entire Loan amount in one instalment before the due date. The bank allows you to settle the loan account by applying for a foreclosure also known as pre-closure. But it is only allowed after the lock-in period.
A lock-in period is the number of months for which you have to pay the monthly EMIs for your Personal Loan. In most cases, the lock-in period is 12 months.
After the lock-in period, you can apply for loan foreclosure. The bank will charge you a foreclosure fee plus GST on the outstanding principal.
Types of foreclosure
Personal loan foreclosure can be initiated by both the parties; the bank (lender) or the customer (borrower).
Bank initiated foreclosure:
When the borrower shows signs of irregularity in loan repayment or defaults on EMI payment, the lender is compelled to foreclose the loan account. In such cases, the bank will auction the borrower’s collateral to collect or to raise money equivalent to the remaining loan amount. The bank will then use this money to foreclose the loan account.
Customer initiated foreclosure:
To go debt free, borrowers do apply for a loan foreclosure. If you are looking to foreclose your Personal Loan, check the foreclosure terms with your bank before applying.
At times, you may wish to be debt free and decide to foreclose your Home or Personal Loan account. However, if you are facing some difficulties in deciding when and how to foreclose the loan, below pointers will help you to make a more informed decision.
Things to Consider Before Foreclosing a Loan
If you're looking to be debt-free and thinking about foreclosing your loan, here are some points to help you make a more informed decision on when and how to do it.
Loan ROI
Check the applicable ROI on your loan. At times, banks do reduce the rate of interest on loans. Recently, during the pandemic, all banks reduced the interest rate on all loans by a huge margin. It is a good thing to check and compare the current ROI on the loan amount that you have availed and the interest that you are paying. Based on your findings, you can ask the bank to rework your loan ROI.
Reduce unnecessary spending
Make a budget and avoid compulsive buying and unnecessary purchases. Start saving a considerable amount from your monthly income as a loan repayment fund. Such a habit will help you to go debt free and repay your loan amount before the due date.
Use other policy maturity amount
If you have a life insurance policy that is about to mature, you can use the maturity value and the bonus received from that policy to foreclose the loan account. By doing so, you will not pay from your pocket directly and at the same time tackle debt.
Conclusion
Understanding the details of Personal Loan foreclosure is crucial for effective financial planning. Being aware of the associated pre-closure charges and having a clear repayment strategy ensures a smooth closure process.
Having a clear repayment strategy in place will ensure a smooth closure process, helping you settle the loan without any complications while potentially saving on interest.
Frequently asked questions
What is a personal loan foreclosure?
Personal loan foreclosure is the process of repaying the entire loan amount in one instalment before the due date, allowing you to settle the loan account. However, it can only be done after the lock-in period.
Does foreclosure reduce interest?
Personal loan foreclosure can help reduce the interest paid over time, as you are settling the loan earlier than the agreed tenure. However, you may still need to pay a foreclosure fee.
Is it compulsory to pay foreclosure charges?
Yes, the bank charges a foreclosure fee, along with GST, on the outstanding principal when you apply for personal loan foreclosure after the lock-in period.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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