Is It Wise To Cancel A Personal Loan After It Is Sanctioned?

In today’s digital age, to apply for a personal loan is easy. There are many apps, platforms, banks and NBFCs that offer loans, personal in nature, or instant personal loans. To clarify, a personal loan is an unsecured loan which can be used for any purpose as per the borrower’s choosing. The online personal loan application facility offered promises sanction and disbursement in short time.

While it is easy to apply for a loan, is it equally easy to cancel a loan, after deal confirmation? Suppose you have applied for a loan without a clear picture of the terms and conditions or the EMI to be paid. Later, you realise that you cannot pay the stipulated EMI, or are taken aback by the interest component. Or perhaps you find a lender offering far lesser interest rates on the personal loan and friendlier terms and conditions. In such circumstances, is it possible to cancel the loan?

If the loan has been sanctioned, but not disbursed, it is possible to cancel the loan. But this decision needs to be quick as some lenders are quick to disburse the loan once the deal is confirmed. This may be in as little as four hours in some cases. Each lender will have its own set of terms and conditions governing cancellation. This may involve some penalty and fees in some cases.

However, once the loan is approved and disbursed, cancellation becomes far more difficult and expensive. As the loan is disbursed, reversal of the loan is likely to be treated as an early repayment. Most instant personal loan providers levy a prepayment penalty. This could be as high as 2% of the outstanding principal amount, or more. Thus, if you have applied for a personal loan of INR 10,00,000/- and want to reverse the same, even a single minute after disbursal, the prepayment penalty could be as much as INR 20,000/- or more. In addition, you will already have paid the processing fees, along with GST, which will be forfeited. You could however, try to negotiate with the lender to waive off the penalty, either partially or wholly. The decision will depend entirely on the personal loan service provider’s loan policies and your relationship with them.

Once you have chosen your lender, and the loan agreement is signed, confirmed, and money dispatched, it is a costly affair to cancel the loan. So even if you find a lender offering much better terms and lower interest rates than the first, cancelling the first or porting the loan to the new lender may not be cost-effective in the end due to processing charges and prepayment penalties.

However, it may be that you apply for a personal loan for a relatively frivolous expenditure, without working out the maths and then realise that you will not be able to pay the EMIs regularly. In such a case, it is better to cancel the loan and pay the penalty, no matter how much it hurts. Keep in mind that each default on EMI payments affects your credit score. This in turn affects your ability to leverage a loan at a later date. In addition, the lesser the credit score, the higher the interest rates you will be charged by lenders.

Therefore, it is extremely wise to think carefully before applying for a personal loan. Research and compare the interest rates, penalties, EMIs and other terms and conditions of different lenders before making a final decision.