Foreclosure Charges on Personal Loan

A Detailed Guide to Personal Loan Foreclosure Charges

July 14, 2023 • 4987 views

Personal loans are saviours when you require funds urgently. However, they come with several charges, including foreclosure charge. Also known as a pre-closure charge, a foreclosure charge on a Personal Loan is the amount that the lenders levy if the borrower wants to repay the outstanding loan amount before the pre-set loan tenure ends. This blog helps you understand the meaning of foreclosure charge, why is it levied, how to calculate it, and if you can avoid paying it. Read on!

What is a Foreclosure Charge?

Personal loan foreclosure means paying off the entire loan amount before the loan term ends. When you choose to foreclose your personal loan by paying off the remaining balance, you may also have to pay additional charges imposed by the lender. This charge is known as the a personal loan foreclosure charge. The foreclosure charges of loans usually vary between 3%-7% and are usually decided when applying for a loan.

Why are Personal Loan Foreclosure Charges Levied?

A personal loan foreclosure charge is levied to compensate for the interest the lender would have earned had you continued paying EMIs. The specific foreclosure charges on a Personal Loan can differ depending on your lender. Foreclosure charges are calculated on your outstanding principal loan amount, including applicable taxes. Let’s understand how a foreclosure charge is calculated in the next section.

Also Read: What is the Procedure to Close A Personal Loan?

How is Foreclosure Charge Calculated?

Foreclosure charge is calculated using the following formula:

Foreclosure charge = Outstanding Loan Amount * Foreclosure Charges Percentage * Remaining Tenure (in months) / 12

For example, your outstanding loan amount is Rs.1,00,000, the interest rate is 6% and the number of months is 7. Applying the formula, the prepayment penalty would be:

1,00,000 * 0.06 * 7/12 = Rs.3,500

Your personal loan foreclosure charge is Rs.3,500.

The lender could also use a differential interest rate method to determine the prepayment penalty. The interest differential method calculates the difference between the interest rate on the loan and the current market interest rate on a similar loan. For example, if the original interest rate was 7% and the current interest rate is 5%, the difference would be 2%.

This difference is multiplied by the principal amount:

Rs.1,00,000 * 0.02 = Rs.2,000

This amount is multiplied by the number of remaining months to pay the loan divided by 12. If the number of remaining months is 10:

Rs.2,000 * (10/12) = Rs.1,666

By this method, the foreclosure charge that you will incur is Rs.1,666.

What to Do If You Are Asked to Pay Foreclosure Charges?

Completely avoiding foreclosure charges is difficult but it can be negotiated.  If you are an existing customer of that bank with a savings or current account, then your bank may consider and provide you a discount. And if you have fixed deposits as well, then there are chances that your charges will be waived.  

Also Read: What is FOIR and How it is Calculated for a Personal Loan?

To Conclude

Many lenders levy personal loan foreclosure charges. It is advisable to check all the terms and conditions before getting a personal loan. While you cannot avoid foreclosure charges, you can plan your repayment better. Choose a trustworthy lender like Poonawalla Fincorp. Our Personal Loan comes at attractive interest rates, minimal documentation, and zero hidden charges. Get the right loan from the right partner and you won’t have to face any last-minute surprises.

Frequently Asked Questions

  • Are foreclosure charges applicable for a Personal Loan?

Yes, many lenders levy foreclosure charges on personal loans. Check with the lender before getting a loan.

  • How to avoid foreclosure charges on Personal Loans?

You cannot avoid paying foreclosure charges unless you make a special request to your lender and your lender agrees to it. If you want the pre-closure charges to be waived, contact your lender.

  • Can foreclosure fees be waived?

In India, lenders can waive foreclosure fees on Personal Loans, but it varies depending on the lender's terms and conditions. Some lenders may offer the option to waive these charges in certain situations or for specific loan products. To find out if foreclosure fees can be waived, it is necessary to carefully read and understand the loan agreement. Additionally, it is recommended to discuss with the lender to clarify if they have any provisions for waiving these fees.

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Personal Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply

poonawalla fincorp team

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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