What is Foreclosure: Overview, Process and How It Works

July 19, 2023 • 7563 views

Imagine this: You are excited and all prepared to buy a new property. But when you enter the real estate market, certain terms are not to your knowledge. It is essential to be familiar with the terms to make a wise decision. One such term is ‘Foreclosure.’ Moreover, if you are taking out a Loan Against Property, a Business Loan or a Personal Loan, then being equipped with the terminologies of foreclosure is necessary. To get the answer to the question of what is foreclosure and how it works, read on. 

What is Foreclosure?

Foreclosure means the repayment of your loan in a single amount before your loan tenure ends. Borrowers can choose how many Equated Monthly Installments (EMIs) they want to pay before foreclosing their loan. This allows them to prepare ahead of time and decide how much they wish to pay in a lump sum to close the loan. Borrowers who have control over the foreclosure process can strategically manage their money and make informed decisions about the timing and lump sum payment they want to settle the loan. Depending on their financial capabilities and goals, borrowers can now take a tailored strategy to loan foreclosures.

How Does the Foreclosure Process Work?

The repayment of the remaining principal amount in a single instalment before the scheduled conclusion of the loan term is referred to as pre-closure or loan foreclosure. This method not only allows borrowers to lower their interest liability significantly but also allows them to liquidate the loan account considerably ahead of its intended lifetime. By opting for pre-closure or foreclosure, borrowers can reap the benefits of early debt payback, such as decreased interest payments. It enables borrowers to manage their finances more effectively and attain financial freedom more quickly.

Borrowers must submit an application to their lenders separately to begin the process of loan foreclosure or pre-closure. Following receipt of the application, the lender will undertake a thorough evaluation, taking into account elements such as total outstanding debts, remaining loan duration, and interest already paid. The lender calculates the foreclosure balance using these calculations. If the borrower is satisfied with the computed amount, they can make the payment and effectively close the loan. This methodical technique guarantees that borrowers and lenders are on the same page when evaluating the right foreclosure amount, allowing borrowers to settle their debts efficiently and bring their loan obligations to a close.

Required Documents for Foreclosure

Along with your application for loan foreclosure, you are required to submit a few documents. These documents include the following: 

  • Proof of Identity: This can be verified using documents like your Aadhaar Card, Passport or your driver’s license 
  • Proof of last EMI payment: This can be shown using your recent bank statement 
  • Loan documents 
  • Details of your loan account 

Fee & Charges of Foreclosure

Borrowers frequently prioritize early repayment when taking out a loan to settle their obligations as quickly as possible. However, lenders frequently levy prepayment penalties, also known as foreclosure charges, as compensation for the lost interest revenue caused by the loan's early termination. If you wish to make a prepayment, you should calculate the foreclosure charges and carefully examine your financial status to minimize the payout.

However, certain NBFCs like Poonawalla Fincorp charge: 

  • 0% foreclosure charges for foreclosure of Personal Loan 
  • 0% foreclosure charges if you pay it from your own sources and 5% if payable from other sources on the outstanding amount for a Pre-Owned Car Loan
  • 0% foreclosure charges if you pay it from your own sources and 4% if payable from other sources on the outstanding amount for a Loan Against Property 


Understanding foreclosure is an initial step towards empowering yourself in the face of financial adversity. It is advised to go through your loan documents thoroughly and get familiar with each and every term to avoid any obstacles in the long run. Whether it is for a Home Loan, a Business Loan or a Personal loan, you should carefully assess your financial capabilities and then decide on foreclosing. All in all, foreclosing a loan means saving on interest and reducing your current liabilities. 


1.    What are the steps of foreclosure action?

To foreclose your loan, the following are the steps to action

  • As foreclosure cannot be done online, visit your nearest lender or financial institution branch 
  • Submit your application by adding the necessary details 
  • Submit the necessary documents, including - loan documents, identity proof, proof of EMI payment 
  • After submission of the application, pay the foreclosure charges and the outstanding principal amount 

2.    What is an example of foreclosure?

For example - An individual has taken out a Personal Loan of Rs.20 Lakh from a lender. The repayment tenure of the loan is 5 years. However, the borrower gets hold of funds and wishes to repay his loan before his 5-year tenure. This process of paying back your loan before your loan term ends is known as foreclosure. 


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. 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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