Everything you need to know about personal loan foreclosures

When you apply for a personal loan, you can decide on the loan tenure and space out the EMIs for the predetermined period. As your monthly budget allows, you can clear EMIs each month. This momentum is good, but what if you have extra income that helps you close the personal loan early? In such cases, lenders offer the option to foreclose. It helps you go debt-free sooner, and you are not bound to the personal loan tenure. Such foreclosure comes with certain rules and charges worth considering before you make the move.

What is personal loan foreclosure? 
 

Personal loan foreclosure refers to repaying your entire outstanding loan before the agreed-upon tenure ends. This way, you no longer have to continue with your monthly EMIs. It is a choice where you close the personal loan early in one go through a lump sum payment.

Foreclosure typically requires the sanction letter that you initially received, which outlines the total outstanding amount as of a specific date, including principal, interest, and other applicable charges, like a foreclosure fee. This is typically charged as a nominal percentage of the outstanding principal. Some lenders, like IDFC FIRST Bank, waive this fee to facilitate easy and affordable personal loan closure.  

Foreclosure vs Prepayment 
 

When it’s about closing a personal loan early, you have two options: Foreclosure and prepayment. These options are often used interchangeably, which isn’t entirely wrong, but they can work quite differently based on how you approach them. Knowing this slight distinction helps you make an informed call.

Personal loan foreclosure is when you bring the loan to a complete stop. You repay the entire outstanding amount in a lump sum to exit the loan before the tenure ends. After the payment, the lender confirms the closure. As a result, the personal loan is fully closed, and you are no longer liable to clear any future EMIs.

Prepayment, on the other hand, is either made in part or in full. When made in full, it translates to a personal loan foreclosure. However, making part prepayment, which includes paying an extra amount over your regular EMI, reduces the outstanding balance. It also shortens the loan tenure, depending on how the lender applies it. But the personal loan still stays active.

You can choose between the two approaches based on your cash flow and lender policies. If you have more funds to contribute to a clean break, foreclosure works best. But if you have a variable income just enough to provide a bit of breathing room, even if it doesn’t close the personal loan, you can consider part prepayment. 

Process to get a foreclosure letter
 

When you decide to close your personal loan early, going through the following process gets you the foreclosure letter as a result:

1. Review your sanction letter

You will find the details of your personal loan terms in your sanction letter. Go through it to understand the rules and applicable charges.

2. Contact your lender

Inform your lender of your intention to close the personal loan on a particular date and get the details of the outstanding loan amount before you initiate the payment.

3. Fill out the foreclosure form

Most lenders require a formal foreclosure request. For this, you must fill out a foreclosure form online or at the branch. This triggers the official start of the closure process.

In case of a FIRSTmoney personal loan by IDFC FIRST Bank, you can foreclose your loan easily via the app or using the QuickPay link. Enjoy zero foreclosure charges to make the entire process more affordable, while you save on future interest costs.

4. Make the full payment

Pay the quoted amount within the validity period after initiating the closure request to prevent recalculation of interest and charges.

5. Get confirmation

After the successful payment, the lender will issue a foreclosure letter and no-dues certificate. These documents confirm that you closed the loan account.

Closure breakup explained
 

Before you make the final loan payment, take a look at the components of the closure amount:

• Outstanding principal: This is the unpaid portion of the original personal loan amount after adjusting all EMIs paid to date.

• Accrued interest: Interest is calculated up to the foreclosure date. This portion is added to the principal amount to form the total outstanding balance.

• Applicable foreclosure charges: Some lenders charge a percentage ranging between 2-5% of the outstanding principal. However, IDFC FIRST Bank offers zero foreclosure charges on its FIRSTmoney personal loan.

• Applicable taxes: Taxes such as GST may be applied on the foreclosure charges, as per prevailing regulations.

• Overdue EMIs (if any): For any missed EMIs, you incur late payment charges. If not cleared already, these are included in the due amount you are supposed to clear before the personal loan is closed.

Importance of a no-dues certificate after foreclosure 
 

After you complete the foreclosure process, you receive a no-dues certificate along with the foreclosure letter. It acts as the final proof of your personal loan account settlement. Here’s why it’s important to obtain:

• Proof of zero liability

The no dues certificate explicitly states that you owe nothing further to the lender. Hence, it protects you from future disputes in your credit report or while applying for further credit.

• Protects your credit profile 

In rare cases, closed personal loans may still reflect as active in your credit report. This is a system error and can dip your credit score. With a no-dues certificate, you can dispute such errors to quickly resolve such issues.

• Helps with future borrowing

When applying for a new personal loan or credit card, lenders may look into your past credit behaviour through your credit report. They may also ask about the past closures, where the no-dues certificate provides reliable confirmation.                

Impact of foreclosure on credit score 
 

Foreclosing a personal loan is generally considered good. However, it can have a mixed impact on your credit score, based on how smoothly the personal loan is closed:

• Temporary drop

You may notice a small dip in your credit score shortly after you close the personal loan. This usually happens because you essentially remove an active credit account. It readjusts based on your positive repayment history soon after.

• Shortened credit history     

As you close your personal loan, you are reducing the age of your credit history. If it were among your older credit accounts, you would impact your credit score slightly. This usually evens out as you maintain your other active accounts responsibly.

• Improved long-term creditworthiness

Lower outstanding debt improves your repayment capacity and overall financial stability. As a result, your credit health improves over time. Lenders view you as a responsible borrower and offer better credit deals.

• Disturbed credit mix

With every foreclosure, you take out a distinct type of credit you hold. This impacts your credit mix of personal loans and credit cards. Since this plays a minor role in influencing your credit score, it has a temporary impact.

All these effects on your credit score are manageable if you receive a foreclosure letter and your personal loan closure is properly reported as closed.

Final words
 

If your finances allow, personal loan foreclosure is a smart step to go debt-free early. Despite it being a good thing, it’s critical not to rush through the process. Check what goes into the final amount and how it reflects on your credit score. Understand the charges, timelines, and documentation to ensure you close the personal loan on proper terms. When you approach it responsibly, personal loan foreclosure does more than just reduce debt. In the long run, it strengthens your financial confidence in securing prospective credit.