Loan foreclosure: How to do it and what are the advantages?

Loan foreclosure or early repayment is a process by which a borrower can pay off their loans all at once before the end of their loan tenure. If you find yourself in a position where you have additional/surplus funds and you want to repay the loan as soon as possible, you can opt for loan foreclosure.

What are the advantages of foreclosing your loan?

Interest Savings:

Repaying the loan early reduces the total interest paid over the loan tenure. This can result in significant savings, especially for loans with higher interest rates.

Reduced monthly obligation:

Clearing off a loan ahead of schedule provides a sense of financial freedom. It eliminates the ongoing monthly obligation and may free up funds for other financial goals.

Improved Credit Score:

Successfully closing a loan can have a positive impact on your credit score. It demonstrates responsible financial behavior and debt management.

Are there any foreclosure charges for foreclosing a loan?

Yes, almost all lenders charge a nominal fee when you want to foreclose a loan. The reason for charging this fee is that it helps lenders cover the interest they will not get due to the early repayment of the loan. Typically, this charge ranges between 3%-6%.

How to Foreclose a Loan?

Prepaying the loan is extremely simple and quick. These days, Banks and NBFCs provide loan foreclosing options on their websites. You can simply repay your entire loan amount using various online payment modes.

If you don’t want to use the bank website for it, you can inform your lender about your intention to repay the loan. They can provide details on the charges and guide you through the process.

Pre-payment vs Foreclosure

While we are talking about foreclosing a loan, it’s important to highlight that pre-payment is often confused with foreclosing, but both are really different. While prepayment means only paying some amount of your loan before the end of the repayment period, foreclosing, as the word itself suggests, means closing the entire loan at once.

When should you consider foreclosing a loan?

1. Windfall gains: If you receive any bonus at work or any extra unexpected income, it will be an excellent strategy to foreclose your loan. It will save you a lot of interest and reduce your obligations, too

2. Interest rates getting high: If you feel the interest rates on your loan are getting too tough to repay, consider foreclosing the loan.

3. At an early stage of acquiring the loan: Foreclosing will only benefit you if you foreclose it early after acquiring the loan. At the later or the last stage of your loan, you’ve already paid almost all the interest on your loan, and what is left now is the principal amount, so less interest is saved.

While foreclosing your loan is a really good option, you should consider the fee, the timings and the benefits of foreclosing your loan.

If you want to know how to pay off your loans easily read our blog here à How to pay off your loans easily: Debt Snowball and Debt Avalanche Method