Struggling to pay the monthly EMIs of a personal loan? Saved up and thinking of foreclosing a loan? Foreclosing a personal loan means paying off the loan amount before it is due. Lenders calculate your foreclosure charges keeping your outstanding loan amount, number of EMIs paid, and interest rates in mind. If the pre-payment timing fits and you have a good CIBIL score, foreclosing on a personal loan can boost your credit scores immensely. By doing a personal loan foreclose, you can also rest easy knowing there is one less debt to worry about. You can do a balance transfer or use your own funds to pay off your personal loan. However, whether or not it is a good idea to foreclose a personal loan depends on your income, timing, and financial situation. 

Factors to note when planning to foreclose a personal loan

Foreclosing a personal loan means paying off the balance in full before the end of your term. Here’s a list of the following factors to note before foreclosing on a personal loan. 

• Calculate your interest savings: Determine your pre-payment amount and how much interest is due. If you will save a significant amount of money on interest and pay off a good chunk of your outstanding loan balance, only then you may foreclose your personal loan.
• Read through the pre-payment terms and conditions: Some lenders have a limit on how much money you can pre-pay in a single transaction, while some may levy additional pre-payment charges. Make sure to read through your lender’s foreclosure terms and conditions before you pre-pay the amount. 
• Evaluate your financial goals: Consider your long-term financial goals. If you plan to make bigger purchases or may need liquid cash for some expenses, it is not a good idea to spend it on foreclosing on a personal loan. Do not run your savings funds dry to pre-pay a loan amount. If you are having trouble paying off the EMIs, consult with financial planners to help you with a budget.  
• Have a good FOIR: If you have multiple debts with high-interest rates, make sure that you have enough income to foreclose on a personal loan and pay off those EMIs as well. Do not ignore one loan to pay off another personal loan in full. Make sure that your fixed-obligations-to-income ratio is around 45% to 50% and use the remaining funds to pre-pay your personal loan. 
• Check your credit scores: If you have good credit scores, it is likely that you are on top of all your EMI payments. Consider the terms of the loan agreement and if you feel that you will save a significant chunk of money and the timing is right, only then pay off your personal loan. 
• Consider your liquid cash assets: If you have enough liquid cash to close off your personal loan without impacting your day-to-day expenses, you may consider paying off the loan. However, under no circumstance, you should use your emergency funds to pay off an ongoing loan. It will leave you in a very vulnerable situation if you need the excess funds later in times of financial crunch. 

Pros of foreclosing a personal loan

Foreclosing a personal loan has some advantages like the following:

• Saves money: You can save a lot of interest money if you pay off your personal loan ahead of time. Closing off a loan ahead of time also relieves you of an immense financial headache. When you do not have to worry about paying off a certain amount every month, you can take career risks or explore new opportunities with ease. 
• Improves credit scores: If you pre-pay your personal loan amount ahead of time, it may boost your credit score. Lenders will view you as a reliable borrower and you will find it easier to avail of more loans in the future. However, make sure that you have an adequate amount of spare funds to pay it off. 
• Lowers monthly expenses: If you foreclose a personal loan, you do not have to pay monthly EMIs anymore. You can use it to meet other financial obligations. If you have multiple loans, closing off one of them could positively impact your credit history as well. 

Cons of foreclosing a personal loan

Before foreclosing on a personal loan, take note of the following disadvantages that may hamper your financial growth.

• Pre-payment charges: Lenders may impose pre-payment penalties which may end up being more than the interest amount due. These would significantly reduce the savings that you would have hoped to achieve while foreclosing on a personal loan. You must discuss with your lenders openly about pre-payment charges and other additional costs before going forward with your decision. 
• May negatively impact credit scores: If you foreclose on a personal loan too early, it may give off the impression that you were unable to carry on paying off the monthly settlements. Ensure that your pre-payment timing is just right- not too early nor too late, when you would have paid off the majority of the interest. Use an online EMI calculator available on ApnaPaisa to ensure that you have the income to pay off the EMIs before taking a loan. 
• Liquidity: If you use your emergency funds or your savings to foreclose on a personal loan, you will end up with no safety net in case of a financial crunch. Make sure that you have adequate spare income handy before deciding to foreclose on a personal loan. 

Is it a good idea to foreclose a personal loan in 2023?

With the recent repo rate hike on 8th February 2023, the interest rate has gone up to 6.50%. Since last year, there have been frequent repo rate increases. In such a scenario, it is the borrowers who have to pay higher interest rates. If you have sufficient funds to foreclose on a personal loan before the end of its term, you will save a lot of interest money. 

However, before foreclosing on a loan, you must evaluate the legal conditions of your loan agreement and your financial situation. If you have planned big-ticket purchases in the near future or you run the risk of running your savings dry, please do not foreclose on your personal loan. Some lenders may ask for outrageous pre-payment charges, that would outweigh the money you would save on the interest if you did a personal loan foreclosure. Also, if you have other high-interest debts, you can pay them off instead of foreclosing on one loan. 
If you feel confused or are not sure if you have enough assets to cover the entire foreclosure amount, reach out to a financial advisor. We, at ApnaPaisa, have several experts to help you understand your financial obligations and decide on what to prioritize.