Shall I Pay a Foreclosure Charge on Personal Loan or Keep Paying EMIs?
Most of the people who take out loans do so because they have an urgent need of money and do not have the required funds at that point in time. However, later on, it may so happen that you get the funds from a source, such as a bonus from work or gift from family or a long due payment, etc. In times like these, you will be divided between the choice repaying your Personal Loan or continuing the EMIs.
Given below are some factors that can help you decide if you should bear the foreclosure charges or continue with the repayment schedule:
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- Current Load of EMI on your monthly income: If you are servicing multiple payments in a month such as Credit Card dues, Home Loan EMI, Car Loan EMI, and Personal Loan EMI, you might find yourself in a situation where instalments are consuming a significant chunk of your salary. If your monthly repayment commitments is anywhere close to 50% of your net income, you should certainly consider paying off some of your debts with an available surplus. It will not only ease the pressure on your monthly budget but will also improve your Credit Score.
- Projected future income: If you are a salary earner with a relatively stable income source, you may not want to consider paying off the foreclosure charge to get rid of the EMIs. You are better off investing the windfall and letting that money grow while you service your Personal Loan from your monthly salary. If you are unsure of your future income, you may want to get rid of the loan EMIs as early as possible.
- Amount of foreclosure fee: Generally, the lenders will charge anywhere between 2% to 6% of the principal amount outstanding along with the applicable GST in order to foreclose the loan. You will have to do some calculations about Personal Loan Interest Rates. Analyse if the difference between your remaining EMIs and foreclosure fee are comparable.
- Lock-in period: Some banks have a lock-in period for loan foreclosure. Banks do it to ensure that they get a certain amount of money from a loan account. For example: Yes bank has a 1-year lock-in on Personal Loans that are 5 years long. Lock-in can be waived in some conditions though this is mostly a tough nut to crack.
- Seasonal offers on fee waiver: While these are few and far between, many lenders may introduce waivers on foreclosure fees, especially when the lenders themselves are facing a liquidity crunch and do not want to trigger any alarm bells. By introducing waivers of prepayment fees, lenders nudge their borrowers to repay a considerable chunk of their outstanding debt without triggering any warning in the markets.
- Your credit score: If you are in the process of building a credit score to take a long term loan such as Housing Finance, you may want to check the impact of foreclosure on your credit score. Paying off early will provide a small but instant boost to your credit score. Likewise, if you let your loan run its course and the credit score will anyways climb with every quarter on successful repayments of your EMIs.
Advantages of Personal Loan foreclosure:
- Freedom from debt: The fact that you have a monthly payment to make to a bank or an NBFC can induce a lot of pressure and stress. Especially when you have a very low-risk appetite. In such cases, Personal Loan foreclosure is good for mental health. Similarly, it works as a great morale booster.
- Opens up your eligibility for higher loan amounts: If you are looking to get a larger loan amount like a Home Loan or Car Loan, it is best to prepay your Personal Loan. Banks will only lend to a certain percentage of your monthly income. If you do not have anything blocking your monthly eligibility, you can easily take out the maximum possible Home Loan and get a bigger, better house.
- Money savings: If you are not looking to take out a new loan and are getting a very good deal on Personal Loan foreclosure, it is always best to pay off your existing loan early. In many cases, you can save as much as 10% to 15% or even higher amounts by prepaying the loan, particularly if you are in the first one-third of the loan duration.
Personal Loan Foreclosure Process
The very first thing you need to do to foreclose a Personal Loan is to check out the process involved and the charges involved. Some banks may require you to send a written application. Make sure that you cross-check all the loan account details in the application. Upon receiving the loan application, the lender will inform you of the charges involved, the actual amount you need to pay, mode of payment, and the payment deadline.
Most lenders will ask you to make the payment by cheque and up to a certain date. Many may agree to process the request with an electronic payment, so you should always check with them about their preferred method. Upon receiving your payment, the banks will process and foreclose your loan in a matter of days. The bank will issue a letter of loan closure and a NOC once the process is complete.
It is strongly recommended that if you were paying EMIs through auto-debit from a bank account, you should keep money equal to one more EMI until the next EMI date or until you get the loan closure letter and NOC from the bank. This is because ACH stoppage instruction might take some time to process, and in between, if your EMI bounces, you will have to pay an extra charge. Do not worry if the lender does deduct an extra EMI, they will refund the money automatically in a week or two depending upon their internal process.
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