Personal loans constitute to be one of the more crucial financing products that help you to tide over financial emergencies. However, being typically unsecured, these loans carry a relatively higher interest rate as compared to other products.
You might prefer to pre-close your personal loan in order to save on the interest outgoes that you would have to bear with otherwise. Moreover, if you are planning on applying for long term credit – a home loan, for instance – in the near future, it would be wise on your part to clear outstanding personal loans - something that can help to pull up your credit score by notches.
Stated below are a few factors that you must keep in mind before you decide to close a personal loan. Read on:
Whether foreclosure is allowed
Certain lending institutions do not permit foreclosure of loans. It follows that you should ideally check if your preferred lender has the provision for a pre-closure or not. Should pre-closure not be allowed, you would have no option but to continue servicing the EMIs till the end of loan tenor.
- Lock-in Period
Many lending institutions attach a lock-in period during which you would not be permitted to pre-close your personal loan account. Generally, this lock-in period is of 12 months; however, it is likely to vary across institutions and their statutes. You should ideally verify if your lender attaches any lock-in period before moving ahead with pre-closure.
- Pre-closure Penalty
Most lending institutions levy a penalty for pre-closure of personal loans. The pre-closure penalty can range anywhere within 0.5% - 5% of the outstanding loan amount. Before opting for a pre-closure, make sure that the amount you’d save on, in all probability, calculates to be higher than the pre-closure charges.
Simply put, pre-closing your personal loan should be an informed decision, one that you arrive at after having compared the potential savings (on interest outgoes) and the penalties payable, if any.
- Follow the Procedure
In order to close a personal loan, you’d have to comply with a few rules and regulations. For instance, every lender has a set procedure for loan closing that you will have to abide by. You’d need to intimate your decision to close the loan to your lender and carry all relevant documents with you. Also, have the proof of loan closure handy in order to avoid any confusion in the future.
How to close Personal Loan
Loan closure can be of two types:
1. Normal closure: This refers to closure of your loan account at the end of the loan tenor after having paid off all the EMIs.
Process
For normal loan closure, you’d need to visit the issuing branch, along with your id proof, a cheque in case of any outstanding amount and your loan account number. You may need to fill and submit a loan close application to the lending institution. Once the loan is closed, the lender will issue a “No Dues Certificate” or a loan account closing letter as proof of closure.
2. Pre-closure or foreclosure: This refers to paying off the outstanding amount and closure of your personal loanaccount prior to expiry of tenor.
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