Part Payment and Foreclosure of Loans

Part Payment and Foreclosure of Loans

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A loan is generally popular as it helps to get over a temporary or an urgent need of cash. Loan is often used to buy consumer durables, for wedding expenses, health treatment or even for vacation. Loans are offered by most banks in the country with some variations in charges and fees. If a loan prepaid or paid partly or foreclose there are certain advantages for the customer.

Part Payment

Part payment of a loan happens when you have a lump sum amount of idle money, but is not equivalent to the entire principal outstanding loan amount. Part payment works because it brings down, the unpaid principal amount, which in turn brings down your EMIs and the total interest you pay. However, it is important to keep in mind that, this concept will help only when you make a significant amount of lump sum money as part payment.

This is an easy but an effective way to save down on your interest amount as the part-payment amount directly gets deducted from your Principal Outstanding as on date/month of making the partial payment.

At any stage, closing the loan in right way is extremely important as it may have an effect on your CIBIL Score. It is important to be aware of the procedures involved in properly closing the Loan. At any stage if you face any issues or have a query, the customer service of the Banks can help you to get through the same.

Foreclosure/Pre-Closure

It refers to completely paying off a loan before the loan tenure has ended. Just like prepayment charge, foreclosure charges range from 2- 5% of the loan amount. Firstly, if the prepayment in full can be done relatively early into the tenure of the loan, a customer tends to save a lot on the interest. A loan generally has a lock in of about one year after which the entire outstanding amount can be prepaid.

Procedure for Pre-Closing

1. Visit the bank where your Loan is active
2. Carry the necessary documents such as ID Proof, Bank statements mentioning the final clearance of the last EMI, Cheque or Demand Draft with which you will pay the entire balance amount.
3. The lenders usually charges foreclosure charge on the outstanding amount which must be paid along with the principal outstanding amount.
4. Once the entire amount is paid either through a Cheque or Demand Draft, the Bank will give an acknowledgement letter which must be kept for future reference.

Once all the steps are complete, the bank will send the NOC (No Objection Certificate) after few days of pre-closing the Loan.

Difference between Prepayment and Pre-closure

In case of prepayment, you pay off a considerable chunk of your outstanding amount in one go. This reduces your outstanding amount and your futures EMIs are likely to be lower. You can opt for this option as and when your income allows you to pay off a big part of your debt. Banks do charge a fee for making prepayments, so make sure the overall benefit you receive is higher than the fee.

Pre-closure, on the other hand, means closing a loan account ahead of the loan tenure. As the name suggests, it means that you pay off your entire debt in one go. Let’s take this example: You took a personal loan worth Rs10 lakh two years ago. Your loan tenure is five years. In the two years since you took the loan your income has increased significantly. You have managed to save a large sum that you want to pay towards the loan to close it. You can do so after paying a small fee for making a pre-closure of your loan.

Most banks and financial institutions have a lock-in period in place where they refrain from any prepayment or pre-closure. Once you have crossed the lock in period, you can pay the required fee and either pre-close or prepay your loan.

Does it make more sense to make a Prepayment or Pre-closure?

Paying a loan through its tenure or making a prepayment on pre-closure are the options available to you when you take a loan. You can choose to repay in any of these ways. The decision is ultimately yours.

If you have a fixed income that is growing steadily, you can choose to repay the loan till the end of the tenure. If your financial condition improves and you have a significant amount available at your disposal, you can pay off your loan partly or entirely. This will reduce the burden of your EMIs in the future as the outstanding principal decreases. You can also pre-close the loan if you have the funds.

Decision of the Pre-closure or Prepayment should depend on total benefits. This doesn’t impact on your credit score. However there are no adverse effects on your credit score if you don’t go for pre-closure or prepayment.

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