How To Close A Personal Loan Early To Save Interest?

And since personal loans are collateral-free loans, lenders won’t ask you for security or guarantor. It means that you are not required to put any of your personal or professional assets on the line to qualify for financing. You need to fulfil simple eligibility criteria regarding age, citizenship, monthly income, and credit score.

Another benefit of a personal loan is that it allows you to choose a tenure as per your repayment capabilities. This ensures that you won’t have to burden your monthly budget to repay your personal loan. You can vary your personal loan EMIs by adjusting other parameters, including your loan amount, tenure, and interest rate.

So, if you want to apply for a personal loan, you can approach a bank or a non-banking financial corporation (NBFC) that provides a personal loan. You can also download personal loan apps on your smartphone and avail of an instant personal loan from the convenience of your home.

Personal loan interest rates

The interest rates are one of the primary concerns of borrowers whenever they want to apply for a loan. When you avail of a loan, you agree to repay the principal loan amount to the lender along with the interest amount. This interest is calculated as per the interest rate levied by the lender on the loan amount. It plays a significant role in determining the EMIs that you have to pay.

The interest rates are different for different types of loans. In the case of personal loans, interest rates are a bit higher than home loans and car loans. It’s because personal loans are unsecured loans and are considered an optional expense by lenders. Although personal loan interest rates vary from one lender to another, they usually range between 8 and 14 per cent per annum.

Pre-closing a personal loan

No doubt, a personal loan can be of immense help during an emergency. You can avail of a personal loan and meet your various financial requirements without any hassles. However, you need to remember before applying for a personal loan that you will have to pay monthly instalments towards its repayment every month. So, you need to plan your finances accordingly.

But if you want to stop your EMIs, you can pre-close or foreclose your personal loan by paying the principal balance amount. Pre-closing a loan serves two benefits: first, you save on the interest amount you would have to deliver on the remaining loan balance, and secondly, your EMIs will stop, and you no longer have to plan for it while preparing your monthly payments budget.

Below are a few reasons why you can decide to foreclose your personal loan before the end of its tenure:

• You don’t want any outstanding debts in your name
   
• You have surplus cash in hand with you
   
• You want to save the interest amount that you would have to pay on the remaining loan balance
   
• You want to reduce or stop your personal loan EMIs
   
• You want to take a fresh loan with the lender
   
• You want to improve your credit score

Difference between full pre-payment and part pre-payment

After you’ve decided to pre-pay your personal loan, you need to determine whether you want to make full pre-payment or part pre-payment. When you decide to close your personal loan account before the end of its tenure, you need to make the full pre-payment by paying the entire loan balance. Or else, if you want to reduce your EMIs, you can make part pre-payment by making a partial payment and reducing your principal loan amount.

Personal loan pre-closure charges

When you make full pre-payment or part pre-payment of your personal loan, you might have to pay a pre-closure charge to the lender. This charge is usually a fixed percentage of the remaining loan balance or the amount paid by the borrower. Personal loan pre-closure charges vary from lender to lender, and they typically range between 1 to 3 per cent.

Some lenders also have lock-in periods for pre-closure of their loans. It means that you can foreclose your personal loan only after paying a certain number of EMIs. This lock-in period may range between one and twelve months.

Steps to pre-close your personal loan

Pre-closure of a personal loan isn’t an arduous task. It’s crucial to understand the process of how to close a personal loan early because it varies from lender to lender.

Below are the steps you may follow if you want to foreclose your personal loan:

Step 1 – Visit the nearest branch of the lender with which you have taken a personal loan. You can also get in touch through an e-mail or a phone call

Step 2 – Inform the customer support executive that you want to pre-close your personal loan and ask for a loan pre-closure form

Step 3 – Enter all details in the loan pre-closure form, including your name, loan account number, whether you want to make full pre-payment or part pre-payment, etc.

Step 4 – Calculate the total amount you have to pay to pre-close your personal loan. It will include the remaining loan balance and the pre-closure charge levied by your lender

Step 5 – Make the payment to pre-close your personal loan through a cheque, Demand Draft, cash, or online payment method

Step 6 – Receive the acknowledgement from your lender. You need to save this acknowledgement until you receive the final loan pre-closure letter and No Dues Certificate (NDC) from your lender. This may take a few days after the pre-closure of your personal loan

Documents required for personal loan pre-closure

When you approach your lender to pre-close your personal loan, you may be asked to submit a few documents. Below is a list of the documents that you may require to pre-close your loan:

• Relevant loan documents including the loan approval letter
   
• Loan statements displaying the EMIs paid to date
   
• Cheque or demand draft for pre-closure

Things to consider while pre-closing your personal loan

Below are the factors you should consider while deciding to foreclose your personal loan:

• Make sure that the foreclosure charge isn’t too high. Evaluate if it’s beneficial to foreclose your loan even after paying the foreclosure charges
   
• Foreclosing a loan makes more sense if you’re incurring a higher interest liability. If your interest liability is higher than the foreclosure charges levied by the lender, you should go for it
   
• Verify the impact of personal loan foreclosure on your tax payments
   
• Foreclosure of loan is more beneficial if done earlier during in loan tenure

The final words

Before you decide on pre-closing your personal loan, make sure it benefits you financially. You should also read your lender's pre-closure terms and conditions carefully before making up your mind.

With Poonawalla Fincorp, you can avail of a personal loan from the convenience of your home. Our loans come with competitive interest rates, flexible repayment tenure, and attractive pre-approved offers.