In today’s time, personal loan has become an easy means of instant financial relief. Loans without collateral, easy EMIs and fast approval make it attractive. Although it has a fixed tenure, many people prefer to repay the loan early when they get extra money. This is called foreclosure. While on one hand it brings benefits like interest savings, mental relief, full ownership of the property and better credit score, on the other hand foreclosure charges can reduce your potential savings.
What are foreclosure charges?
Foreclosure charge is the fee that banks or financial institutions charge for premature repayment of the loan. Actually, through this fee the lenders compensate the interest that they were to get in the entire loan period. Usually this charge ranges from 2% to 6% of the outstanding loan amount. For example, if you have taken a loan of Rs 5 lakh and want to close it after a year, you may have to pay additional charges ranging from Rs 10,000 to Rs 30,000.
Are foreclosure charges applicable on all loans?
This fee is not applicable on every loan. As per Reserve Bank of India rules, foreclosure charges are generally not levied on floating rate personal loans, home loans and MSME loans. However, fixed rate loans, car loans and some personal loans may attract charges ranging from 2% to 6%.
Types of Foreclosure
There are mainly two types of foreclosure:
Complete Foreclosure: In this, the entire loan is closed by making a lump sum payment.
Partial Foreclosure: In this, a large part of the loan is repaid, due to which the burden of EMI or interest for the remaining period is reduced.
On legal basis it is also divided into judicial and non-judicial foreclosure.
What things should be kept in mind before foreclosure
Before deciding on foreclosure, it is important to assess a few important things:
- How much will the foreclosure charge be?
- How much will be saved in interest
- what is the outstanding principal amount
Apart from this, after closing the loan, it is also necessary to obtain a no dues certificate from the bank, take back the original documents and confirm that the records are updated with the credit bureau. Foreclosure done with proper planning and calculations can make you financially stronger by getting you out of debt quickly.