If you’re looking to reduce your financial burden, one of the first things that you should do is try to close any personal loans that you may have. This is because the interest rates on personal loans tend to be higher than other types of loans.
Therefore, by closing them off, you can significantly reduce the impact on your finances. That said, closing a personal loan is not just about paying off what you owe. In fact, it is more than that. You need to account for certain key things while doing so. Here’s a quick look at some of the most important things that you would need to keep in mind while closing a personal loan.
The first thing that you would need to look at when closing a personal loan is whether the terms and conditions of the loan permit you to do so. Many banks and financial institutions enforce a waiting period of sorts, during which you will not be permitted to close a personal loan. Usually, this period is set at 12 months from the date of availing the loan.
That said, once the 12-month period expires, you can immediately move for closure of your personal loan. Therefore, to make the process easier, it is advisable to check the terms and conditions first to ascertain whether you can move for loan preclosure or not.
When it comes to closing a personal loan, just paying the outstanding loan amount may not always be enough. Depending on the financial institution, you may be asked to submit certain documents to initiate the loan closure process. And so, it is absolutely essential to get all of the relevant documents in order first, before actually applying for closure.
For instance, you may be asked to submit a letter requesting for loan closure along with certain other documents such as your identity proof, your loan account number, and a cheque for the outstanding loan amount.
Loan pre-closure charges are something that’s almost universally charged by banks and financial institutions for closing a personal loan earlier than the stipulated tenure. These charges are usually expressed as a percentage of the total outstanding loan amount. It usually ranges anywhere from 1% to 5% of the total loan outstanding. Therefore, this is something that you would need to keep in mind while moving in for pre-closure.
For instance, say you have taken a loan with the following parameters.
Now, say you want to foreclose the loan after 2 years i.e. 24 months. If the principal amount remaining to be repaid at that point is, say Rs. 2 lakhs, the foreclosure charges will be calculated on that amount. In this case, they would come up to Rs. 8,000 (Rs. 2,00,000 x 4%).
This is one of the most important things that you need to keep in mind while closing a personal loan. Whether your personal loan is being pre-closed or you’ve reached the end of your EMI payment term, obtaining a letter or an acknowledgement from the financial institution certifying the loan closure is something that you would need to do without fail.
This single piece of documentary evidence is basically proof of you having closed your personal loan account by repaying all of the dues. In the event of any future dispute, the loan closure certificate can protect you from legal and financial ramifications.
Wondering why you should keep your credit score in mind while closing a personal loan? Here’s why. Generally, when you close your personal loan account, the financial institution is duty-bound to report the same to the credit bureaus, who will then update the same in their records.
However, there are times when this reporting process may be delayed due to several reasons. In the event of such a delay, your credit score may not get updated on time and can even end up preventing you from applying for a new loan. That said, you can get around this by keeping an eye on your credit score before and after you’ve closed your personal loan to ensure that it has been updated. If you find that your score hasn’t been updated, bring it to the notice of the financial institution immediately.
There you have it. These are the five most important things that you should always keep in mind when closing a personal loan. If you have any doubts or need more information on personal loans, make sure to visit Finserv MARKETS.