Personal loans, versatile and tailored to meet various needs, offer a lifeline in circumstances where you need to fund an immediate need. Whether you need funds for a healthcare emergency, purchasing a vehicle, property, higher education, funding a business, or even a relaxing vacation, personal loans cater to diverse life situations.
The flexibility of personal loans lies in their remarkable elasticity, offering choices in usage, tenure, and settlement. Unlike traditional loans, they don't require collateral, providing a convenient borrowing option.
Personal Loans From FinTech Companies
The lending rules and conditions vary across different lenders, and the rise of online platforms and FinTech companies have transformed the loan acquisition process into a competitive arena.
With the emergence of FinTech companies, borrowers can now access funds within a mere 24 to 36 hours, provided they quickly complete their applications and demonstrate creditworthiness. In the modern lending landscape, FinTech companies offer tailored schemes to align with individual borrowers' needs and requirements.
Considerations Before Closing Your Personal Loan
Typically, personal loans come with short tenures, often around 60 months. In the digital era, borrowers can conveniently select their loans, and many lenders exhibit flexibility when it comes to pre-payment terms. If you find yourself with a surplus of funds at any point during the loan tenure, you have the option to pre-close or prepay your outstanding personal loan. The benefits of pre-closure are substantial.
Understanding pre-closure
Many borrowers repay their loans ahead of schedule. Pre-closure or foreclosure is the term for full repayment of the loan in one go prior to the end of the tenure. In essence, it entails paying the pending loan amount in one lump sum, avoiding the monthly installments (EMIs).
Pre-closure carries an undeniable advantage: substantial savings on interest and EMIs that would otherwise accumulate over the entire loan tenure. However, it's important to note that prepayment may entail minimal charges, necessitating careful examination of the terms and conditions before proceeding with closure.
Online and offline lender personal loan pre-closure
While pre-closure might involve certain charges, they are generally minimal. Additionally, terms and conditions differ between lenders from online and offline platforms.
The procedures for online personal loans slightly differ from those of offline loans. For online loans, your outstanding balance is promptly reflected in your digital account, and you receive an acknowledgment as soon as your dues are cleared. Once the loan is fully repaid, you receive a No Objection Certificate (NOC) and a loan closure certificate.
Offline loans require much more – for offline personal loan closure, you need to provide the necessary documents for identity validation, including government identity proofs, your loan account number, bank statements indicating your last cleared EMI, and a check or demand draft for the remaining loan amount. Additional documents requested by the financial institution may vary. It's advisable to liaise with your lender to clear any doubts and ensure a smooth closure process.
Once the borrower submits and the lender validates the required documents, the financial institution issues a letter acknowledging the foreclosure, which should be retained for future reference. Moreover, remember to reclaim all original documents from the lender, submitted during the loan application process. Once the entire process is concluded, the bank will either mail or email a document confirming the completion of the loan.
The impact on credit score
Pre-closure has no adverse effect on your credit score. By repaying your loan ahead of the due date, you demonstrate financial responsibility. Your credit report will reflect a "closed" status once the loan is fully repaid.
Costs and benefits of pre-closure of personal loan
Before making any decisions, it's essential to conduct a cost-benefit analysis and meticulously review your lender's terms and conditions. Check for any prepayment penalties that may be included in the foreclosure amount calculation. It's important to note that since August 2019, as per a Reserve Bank of India (RBI) guideline, prepayment penalty charges for floating interest rate term loans, for purposes other than business, have been abolished by banks and non-banking financial companies (NBFCs).
Each financial institution may impose different lock-in periods before advising loan closure. Some institutions may even charge a pre-closure fee, which varies from one entity to another. It's prudent to clarify this at the outset.
When's the right time to pre-close a personal loan?
If you find yourself with surplus funds and ample time before your loan is due, pre-closure might be a wise choice. However, it's most advantageous to pre-close before nearing the end of your loan tenure. This allows you to maximize savings, as interest rates are typically highest at the beginning of a loan term. It's important to ascertain whether pre-closure would lead to the loss of any tax benefits. Ensure that the tax rebate you're receiving from the loan aligns with the interest savings resulting from prepayment.
Conclusion
The decision to pre-close a personal loan is a significant one, impacting both your financial situation and credit score. By carefully considering the benefits and terms, you can make an informed choice that aligns with your financial goals and circumstances.
FAQs on pre-closure of personal Loan
1. Will pre-closing a personal loan affect my credit score?
No. Pre-closing a personal loan before the due date has no negative impact on your credit score. It showcases your financial responsibility and results in a "closed" status on your credit report.
2. Do I need to pay any fees for pre-closure?
While some financial institutions may impose nominal fees for pre-closure, it's advisable to clarify this with your lender and carefully review the terms and conditions.
3. When is the optimal time to pre-close a loan?
Pre-closing is most advantageous when you have excess funds and ample time left in your loan tenure. Settling your loan earlier in the tenure can lead to greater interest savings.
4. Can pre-closing affect tax benefits?
Before pre-closing a loan, assess whether you might lose any tax benefits. Ensure that the tax rebate you're availing aligns with the interest savings resulting from prepayment.
5. What happens after completing the foreclosure process?
Upon successful foreclosure, your lender issues a credit report reflecting your financial stability. This credit score plays a pivotal role in shaping your creditworthiness for future financial transactions.