Want to Close Your Personal Loan? Here’s a Pre-Closure Process

January 17, 2022 Mutual Fund

A Personal Loan is a quick solution for big-ticket purchases or financial emergencies, making it the most popular type of retail loan. Since the interest rates on these unsecured loans are very high, most borrowers try to repay them whenever they have excess funds. Although it is advisable to repay your Personal Loans as soon as possible, they generally come with a penalty or pre-closure charges. Hence, it is crucial to know whether the Personal Loan Pre-Closure is a good option or not.

What is a Personal Loan?

A Personal Loan is a multi-purpose loan that salaried and self-employed individuals avail without any security or collateral. The interest rate on a personal loan typically ranges from 11% p.a. to 28% p.a., depending on the lender and your creditworthiness. The loan comes with a flexible loan tenure of one year to five years. It is one of the most popular types of loans because you can get the ready-to-use funds in a few minutes, and there is no restriction on the end-use of borrowed funds, as long as it is used for a legitimate purpose.

What are the types of Personal Loan Closure?

A personal loan can be closed in different ways as per your financial condition and requirements. Here are the common ways to close a Personal Loan:

1. Regular Closure of a Personal Loan:

When a borrower pays off all the EMIs regularly until the very last EMI and receives a No Objection Certificate (NOC) and Loan Closure Certificate from the lender, it is called regular closure of a Personal Loan. So, the borrower pays the EMI as per the terms of the loan for the entire loan tenure they had opted for.

2. Pre-Payment of a Personal Loan:

Personal Loan Pre-payment can be done partially or fully. The pre-payment charges vary from lender to lender, and they can be anywhere from zero to 5% of the outstanding loan amount.

• Pre-Closure of a Personal Loan:

  When a borrower decides to close the personal loan by paying the entire dues before the loan tenure completes, it is called a Pre-Closure of a Personal Loan. A pre-closure is generally allowed after six to twelve months of availing of a loan, depending upon the lenders' terms and conditions. A borrower has to pay the remaining loan amount along with pre-closure charges.

• Part-Payment of a Personal Loan:

  When a borrower pays a part of a Personal Loan outstanding amount to reduce either an EMI or loan tenure, it is called Part-Payment of the Personal Loan. Part-paying the loan and keeping the loan tenure as it is, helps in reducing the EMI, whereas part-paying the loan and keeping the EMI constant helps in reducing the loan tenure. Your loan agreement will have the terms and conditions of part-payment, and it also mentions the maximum amount that can be paid as part-payment.

3. Foreclosure of a Personal Loan:

Foreclosure of a Personal Loan is a closure of a loan account by paying the entire dues at once instead of paying regular EMIs. A foreclosure can be initiated either by a customer or a lender. The term is mainly used for a legal process followed by a lender to recover the dues of a defaulted loan.

Are Part-Payment and Pre-Closure of a Personal Loan good options?

A part-payment or pre-closure of a personal loan is a wise decision in many scenarios:

1. Helps reduce your debt burden:

If you are in a debt trap and want to reduce the debt burden, it is advisable to opt for Personal Loan part-payment or pre-closure, depending upon financial condition. You can become debt-free soon by paying off as much as you can. However, you must consider the Personal Loan pre-payment charges and penalties and calculate your total savings before opting for it.

2. Maintains the credit score:

Personal loan pre-closure and part-payment do not affect your credit score. The credit bureaus and lenders consider it a loan paid within a set tenure. However, if you do not have enough credit history, paying your dues regularly for a longer duration will help in improving/ maintaining your credit score.

3. Saves total interest outgo:

As mentioned earlier, the interest rate on a personal loan is generally very high. Opting for pre-closure in the initial or middle stage of your loan tenure can help you save a substantial interest outgo. However, it is not recommended to opt for pre-closure in the later stage of your loan tenure, as you might have to pay more on the pre-closure charges than what you would save on the interest. Hence, it would be best to always do a cost-benefit analysis before opting for a personal loan pre-closure at the later stage of the loan tenure.

4. Lower EMIs or shorter tenure:

Making a personal loan part payment can help you either lower your EMIs or shorten your loan tenure. Part-paying the loan by keeping the same loan tenure will help you reduce the EMI. Whereas part-paying the loan by keeping the same EMI will help you shorten the loan tenure.

What documents do you need for Pre-Closure?

• Your Personal Loan account number that you wish to do a pre-payment for. You can find it on your loan statement or net banking.

• Identity proof, such as your PAN Card, Aadhar Card, Passport, etc.

• Loan-related documents, such as your loan approval letter, loan account statement, pre-payment statement, or any other loan-related document, issued by the lender.

• You should get the pre-closure quote from the bank/ NBFC representative in case of a pre-closure.

• Cheque or demand draft (DD) to pay the pre-payment amount.

What is the process of Personal Loan Pre-closure?

Since most borrowers prefer to repay the personal loan before the set tenure, it is vital to understand the personal loan pre-closure and part-payment process before availing of a loan. The Personal Loan pre-payment process may differ from lender to lender, but here are some common steps that you should follow:

1. Before intimating the lender about your decision to pre-pay your loan, it is advisable to get the repayment schedule through internet banking or contact your Relationship Manager or Customer Care and get the repayment schedule. This statement will give you an idea of your outstanding loan amount. Once you know your outstanding amount and pre-payment charges, you can use online pre-closure calculators to know how much exact amount you are required to pay. It is advisable to consider your current and future financial situation before making a pre-payment.

2. Personal loan pre-closure can not be done through net banking or other online modes. Therefore, you are required to visit the nearest branch of the lender to enquire about your total dues, pre-payment charges, pre-payment process, etc., and do the pre-payment.

3. If you agree to the terms and conditions of the pre-payment and the charges associated with it, you should convey it to the bank/ NBFC representative.

4. It is advisable to read the pre-closure or part-payment form carefully and submit the duly signed form along with supporting documents (as mentioned above) to the lender. If you submit incomplete documents or delay submitting, the lender will cancel or halt your pre-payment.

5. Once you submit all the documents and have a pre-closure quote, you can pay via cash, cheque, or DD. Instead of cash, the lenders insist on paying through a cheque or demand draft.

6. If you are unable to visit the branch, an authorised person can do the formalities on your behalf. The authorised person needs to provide an authorisation letter signed by you along with his/ her identity proof.

7. Once you submit the necessary documents along with a cheque or demand draft, the lender will give you an acknowledgment for the same, which you can use for future reference until the loan is closed.

8. You will receive loan closure confirmation from the lender within a few days of closure.

9. Once the loan is closed, remember to take the necessary documents from the lender, such as the No Objection Certificate, Loan Closure Certificate, etc.

To Conclude:

Since the rate of interest on Personal Loans is very high compared to the other loans, it increases the borrower’s EMI burden. In order to reduce the debt burden, many personal loan borrowers try to pre-close or part-pay it as and when they have excess funds. Since personal loans are more popular amongst salaried individuals, pre-closures and part-payments are common practices whenever they receive bonuses or increments. Although the loan closure is a freeing experience, the banks and NBFCs charge up to 5% of the total outstanding amount as pre-closure fee, which might not offer many benefits, especially if you consider pre-closing your personal loan at a later stage of the loan tenure. Therefore, it is advisable to check for the personal loan part-payment and pre-closure charges before availing of a loan. However, if you already have a personal loan that you are planning to pre-pay, consider your financial situation and do a cost-benefit analysis to know how much you will be able to save and opt for it only if you are able to save a considerable amount.

This article first appeared on PersonalFN here