Have you taken a personal loan to deal with an emergency?
In case you are someone who has availed a personal loan in case of an urgent financial emergency, but now the EMIs are burdening the entire budget and it is getting difficult for you to cope with the growing disparity between the income & expenses. And now, you are thinking of getting rid of that debt obligation and have plans for pre-closing your loan.
Being closely related to personal finance & debt management, there are a few questions that are quite obvious in a situation like this – Would it be suitable to close it at this time of the year in 2022? Or what would it cost in terms of the closing charges & additional fee applicable to it? Or how easy is it to pre-close a loan nowadays?
To address this entire discussion of fore-closing a loan with the recent changes in the MCLR rates and the MPC’s decision to keep the Repo rate unchanged, here are a few suggestions for all of us to have a better understanding and to provide balanced guidance on how to approach such a situation. So let’s get started with the basics first;
What do we require to pay to close a loan account?
Whenever applying for a pre-closure of a loan account, borrowers pay a foreclosure amount in addition to the principal and interest payment. A pre-closure amount is calculated basis of various factors – the tenure of repayment, outstanding amount, no. of EMIs paid so far, and if the pre-payment is done through own funds or from the means of a balance transfer.
For most of the public & private banks, if a borrower pays up to 25% of the total amount, there is no prepayment charge, above which an additional fee of 2% on the outstanding amount is applicable. So it is advised that one must plan their part payment accordingly. Doing so would help in saving a significant amount on the interest component and the EMIs will get a little cheaper.
It is also critical to the prepayment plan that a borrower reads the fine print before applying for fore-closure as most lenders prefer to levy a fixed penalty charge in case the number of months left is more than the pre-determined repayment period as per the contract. To get more details regarding the entire repayment schedule and balance principal amount, one can ask for the amortization schedule from the lender, which is the document that lists out all such details.
What are the repercussions of a foreclosure? If any;
On the credit score –
Well, most people suggest otherwise but foreclosure can prove to be a step towards a good credit score. If the prepayment timing is accurate and as per the norms of the loan contract, it is considered a good repayment behavior depicting that the borrower has been prompt with the repayment schedule and is creditworthy. It is taken as a payment done within the due date, hence bearing no effect on the credit score. Once the closure is complete, the status is updated as ‘closed’ and is reflected in the credit history.
Negotiate the foreclosure charges while taking the loan –
While most lenders declare the foreclosure charges beforehand, there might be a few who do not provide a standard charge or fee against the same. One must make sure that they negotiate these charges while deciding at the beginning. So, it is important to do a cost-benefit analysis before you avail a loan.
Is there a right time to pay off debt?
For those who are good at saving within their budget and are in possession of excess funds, it is always a good idea to foreclose a loan, unless it is almost the end of the personal loan tenure. The reason behind this is that if a loan is foreclosed towards the end of its tenure, the borrower will not be in a position to save much as most of the interest payment is done by that time. In addition, with foreclosure fees and other charges, it would not be a very economical choice.
Calculate before you decide:
In order to go for it or not to foreclose a loan in 2022, it depends on the present timing or the stage of the loan repayment and various other factors. As long as the interest rates are concerned, the low-range repo rate is not here for a very long time and sooner it is expected to rise back to pre-covid levels.
To sum it up, one must assess their financial situation beforehand and consider all the factors including the interest amount that will be saved, and also the pre-closure charges to be paid at the end.