How To Close Personal Loan—Regular Closure and Pre-Closure

When one needs money really quickly, a personal loan can be among the best options that can bail one out of a sticky situation.

Not only is a personal loan typically collateral free, it can also be applied for online. And once all the documents are in place and the lender is satisfied that the borrower can repay the loan, the money can be disbursed in the latter’s bank account in a matter of hours.

A personal loan can be used for anything to cover an urgent home repair to an unforeseen increase in wedding expenses to a medical bill or even kids’ tuition fee for school or college, for which one may not have the money immediately.

Once a personal loan has been taken a borrower’s focus should ideally be on repaying it in full and on time. The borrower can do this by either paying back the entire loan amount over the full tenor of the loan or by doing so prematurely and closing the loan account before the due date.

If a loan account is closed on time, it is called a ‘regular closure’ and if it is closed before time, it is called a ‘premature closure’ or a ‘foreclosure.’

From the borrower’s perspective, a foreclosure is a good idea as not only repaying a loan early reduces their debt burden, it also helps improve their credit score. However, from the lender’s perspective, a foreclosure means they get their money back earlier than scheduled and so they lose out on some interest income.

A Regular Closure

A borrower can make a regular closure after paying back the loan fully. This can be done via equated monthly instalments, or EMIs, which involves paying back a portion of the principal amount and interest at regular intervals. While until a few years ago borrowers would have to give post-dated cheques for the EMI amount, these days most lenders prefer the electronic clearing service for such periodic payments.

After completing the EMIs over the full tenor of the loan, the borrower can approach the lender and inform it that the money has been paid back and that the loan account needs to be closed.

The borrower typically must furnish the proof of having paid the principal and the interest amount in full. Once the bank or a non-banking finance company has verified the repayment, they will close the loan account.

After closing the loan account, the borrower will get a no-objection certificate from the lender as proof of closure of the account.

A Foreclosure

In a foreclosure, a borrower repays the loan before the binding due date.

For this, the borrower needs to approach the lender and take all necessary documents including identity proof, the loan account number, the bank passbook that has all the EMI payment details, as well as a cheque for the amount to be paid for pre-closure.

Oftentimes, lenders tend to levy a foreclosure penalty, which is basically a charge for closing the loan ahead of schedule to compensate the lenders for losing the interest amount.

The foreclosure charges vary from lender to lender and differs for different loan products. Typically, it can range from anywhere from 2% to 6% of the outstanding amount.

This amount needs to be settled at the time of closing the loan account. The lender will then close the loan account and issue an acknowledgement as well as a no-dues certificate, which the borrower will have to retain for any future use.

Conclusion

While you may have to bear an additional penalty, a foreclosure is still a wise option to take as it brings down the debt burden and helps you improve your credit score.

Reputed lenders like IIFL Finance offer personal loans via a simple online process that can be completed quickly and without much paperwork. While IIFL Finance provides personal loans for tenors ranging between three months and 42 months, it also allows you to easily foreclose your personal loan account by charging a nominal fee if you want to prepay your loan before its original due date.