What every Personal Loan borrower should know before foreclosure
We all are aware that Personal Loans come with a higher amount of interest but you also need to know what extra costs are involved when foreclosing your Personal Loans.
We usually take loans to pay for expenses that we cannot meet with the money we have in hand. In order to lessen their burden of paying too many EMIs, some borrowers want to close their loans much before the repayment period ends. Foreclosing the loan is not easy as some lenders impose a penalty. Here are some pointers to read before deciding to foreclose your Personal Loan.
What is a Personal Loan?
A Personal Loan is an unsecured loan given by a lender depending on your salary, credit score, repaying ability, job profile, etc. These parameters make up your Personal Loan eligibility. It is also called a signature loan. The reason why a Personal Loan is unsecured is because there is no collateral such as property or other assets against it. This means that if you do not repay it, the lender cannot sell anything belonging to you in order to make up for the loss. Due to absence of collateral as a guarantee, interest rates on Personal Loans are higher when compared to home or car loans.
Do You Have Other Loans?
Banks and non-banking financial institutions see to it when arriving at the maximum Personal Loan amount you are entitled to, that the EMI you pay does not exceed 30% to 40% of your net salary. Any existing loans by you are also considered when deciding on your Personal Loan amount and even approval.
Find Out If There Are Foreclosure Charges
In order to close your loan before its tenure expires, some banks and NBFC may charge a fee or penalty for doing so. This fee is a percentage of your remaining principal or balance which may be from 1% to 2%. It is important for you to know if your lender charges anything for pre-closing the loan and how much the penalty is before you actually do it.
Prepayment and Pre-Closure Are Different
Borrowers often think the two terms are similar, but a pre-payment is when you partly pay back your Personal Loan before it becomes due as per the EMI schedule. The pre-payment may or may not be equal to final amount you owe. Pre-closure is foreclosure, where you repay the entire loan amount before the end of the tenure.
This is when you make a prepayment without paying any extra charges. But there are certain things you need to keep in mind when you do a part-prepayment, such as you can do it only six times in a calendar year, the minimum prepayment amount should equal to the sum of 3 EMIs and there is no maximum limit for the pre-payment amount for Personal Loan.
What is Your Credit Score?
Since there is no collateral against your Personal Loan, lenders guard against this risk by not only charging you a higher rate of interest, but also checking your personal credit score. A CIBIL Score shows your repayment track record. A higher credit score could let you avail of benefits such as a lower interest rate and doing away with processing charges, which will help you to decide whether or not to pre-close that Personal Loan.
Read Blog: What Your Credit Score Says About You
Now that you are aware of things you need to know before foreclosing your loan, you can take a Personal Loan with confidence. Bajaj Finserv offers Personal Loans with the best and lowest interest rates.