Do you wish to get done with your ongoing personal loans as soon as possible? All borrowers exert the utmost effort to close their existing debts and enjoy a stress-free life. However, pre-closing personal loans – paying the due amount in bulk before the end of the term – may not be a good idea always. It can hamper your credit scores and stop you from building a desirable credit history. To know more, please check out the given discussion now.
Types of Personal Loan Closure
A personal loan has impressed larger segments of the population. It, after all, ensures prompt sanction and distribution of funds. There is also no need for comprehensive documentation or collateral.
Customers receive a plethora of choices since commercial banks, digital lenders, and many other non-bank financial companies (NBFCs) provide personal loans. The extreme competition allows you to receive loans at an interest rate that best suits your needs.
The borrowed sum is directly sent to your bank account when your personal loan application is approved. You then have to reimburse the loan – principal and interest – in the form of EMIs.
Personal loan closures are of two types –
- Regular Closure
The borrower repays the loan adhering to the schedule. Suppose your loan tenure is five years. You repay the sum and the interest as EMIs every month for the entire five-year period. When you pay the last EMI, the lender closes the loan, and your outstanding balance becomes zero. You do not have to take care of any closure charges when you stick to the stipulated schedule.
- Pre-Closure or Foreclosure
The borrower repays the loan before the end of the term. The chief reason why people opt for foreclosure is to eliminate the debt burden. Also, if you pre-close the loan, you save sufficient money on the interest. Nearly all the lenders let borrowers pre-close their loans after 6 to 12 months from the date of the sanction. The borrowers, however, have to take care of the pre-closure penalty.
When does Pre-Closing a Personal Loan Make Sense?
You already know why pre-closing loans might not be a smart move (specified at the very beginning of this write-up). However, if you manage all your monetary obligations diligently, using a personal loan calculator and digitised applications, you would want to know about the scenarios when pre-closing personal loans make sense.
- Good Credit Score and History
If you have maintained an excellent credit score, pre-closing a loan may not create any substantial impact. It will, in turn, inform future lenders that you always repay your debts on time.
- Early in the Tenure
You can save a considerable sum when you close the loan early in the tenure with full payment. However, most lenders do not let the borrowers foreclose their loans in the first 6 to 12 months. Even if you get the approval, you have to pay the penalty. Make sure to conduct a comprehensive cost-benefit evaluation to determine whether foreclosure benefits you.
As evident from the above discussion, foreclosing a personal loan may or may not be the correct choice based on your financial situation. Work out the pros and cons before arriving at a decision.
