How prepayment differs from foreclosure

What is the Prepayment of a car loan?

Prepayment is a process that allows you to repay the loan, either in parts or in full before the tenure gets mature. It allows you to invest in case you have any surplus funds come across in your account.  By doing this so, the total outstanding principal and the interest liability through the EMIs gets reduced.  You can make partial payments into your Car loan from your other accounts online. Since loan interest is calculated based on the outstanding balance, the interest and EMI will be adjusted accordingly.

What is the Foreclosure of a loan?

Foreclosure is a legal process where the borrower chooses to repay a car loan in full before the tenure ends. It is the best way to reduce the interest liability and closing the loan account at the earliest. To make this process a success, a borrower is required to apply for foreclosing a loan with the respective lender. Post filing application, the lender determines the foreclosure balance by checking the total outstanding obligations, interest paid, and the loan tenure. After analyzing all these factors, then gives a quote. Once the borrower is satisfied with the calculation, he or she can pay the amount and close the loan. Remember to collect the original documents related to your Car, no dues certificate, and related documents from the bank or lending institution.

Things to consider before going for Prepayment and Foreclosure

Use those funds for better use: The funds that you want to use for making prepayment or either doing foreclosure of a car loan may be used to invest in some other investment plans that may give you higher returns on the same. This move is beneficial especially when you opt for a lower interest rate car loan.

Need to give penalty charges: Both Prepayment and Foreclosure charges levied by the bank is an additional expense that a borrower needs to bear. Usually, the lender allows making a prepayment of the loan after the borrower makes the payment of 12 EMIs. The penalty fees are not the same as of first prepayment and second prepayment. Therefore, before you make up your mind to prepay or foreclose your car loan, check the terms and conditions of prepayment and the charges levied by the lender.

Car Loan Transfer: Some lenders put an option of car loan transfer. It means that you can transfer your loan from one lender to another that offers a lower rate of interest. But you need to keep in mind that this form of loan transfer will involve additional charges levied by the bank or any other financial institution.

When you do car loan foreclosure at an early stage: If you have decided to prepay/foreclose your car loan, it is good to do that at the initial period of the loan tenure. This way, you can save up on interest payments. Foreclosing a car loan at a later stage of the loan tenure comes up with the penalty fees which may be higher than the interest payment for the leftover EMIs.

Always make use of the car loan EMI calculator that is available on the lender’s website or a third-party comparison portal to find out the EMI Payment, Prepayment Charges, and Interest Payment. Based on the results, decide whether it is beneficial for you to preclose/foreclose your car loan.

Foreclosing car loan can reduce your credit score: Doing a Car loan foreclosure before the tenure ends leaves a negative impact on your credit score. The reason is that every time you are making timely EMI payments, your credit score increases. Paying your loan EMIs on time is a sure-fire way of boosting your credit score. 

To Conclude

Due to the increased market competition, so many lenders are offering attractive loan options, borrowers are, ironically, averse to being debt-ridden. So, they decide to repay their loan at the earliest by opting either prepayment or foreclosure to reduce the outstanding principal, and in turn, get lower EMIs or shorter loan tenure.