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A personal loan can be really useful when you are in urgent need of funds and help you get rid of financial binds. However, you must also repay it as specified to avoid late fees and a bad credit score. If, at any point during the loan tenure, you want to close your loan ahead of the schedule to reduce your interest outgo, you can easily do so. Moreover, pre-closing a personal loan ahead of schedule has a positive impact on your credit rating.

Many lenders permit pre-closure of personal loans by allowing borrowers to prepay the due balance, in part or full, after twelve instalments. However, this varies from lender to lender. You should always choose to pre-close your personal loan if you can repay the loan amount before the term ends. It will help you establish good financial health as well as establish your repayment capability, thus making loan applications hassle-free in the future.

Types of Personal Loan Closures

Preclosure of Personal Loan: Pre-closure of a personal loan means paying off the entire loan amount well ahead of the EMI schedule. If you choose to pre-close your personal loan, you save on the interest amount that you had to otherwise pay to the lender for the remaining tenure. However, most lenders do levy a preclosure fee if you choose to close your loan ahead of schedule to make up for the loss of interest.  

Regular Closure: Under regular closure, you can pay off the personal loan EMIs as stipulated and close the personal loan account as per the agreed upon loan tenure. Following the payment of the last EMI, you must notify the lender about the same to receive an NOC (No-Objection Certificate) mentioning the closing of the loan account as well as the loan closure certificate.

Part-Payment: You can lower your future monthly instalments and/or the term of the loan by choosing to pay a lump sum amount to the lender anytime during the tenure of the loan.

Personal Loan Pre-Closure Charges

Every lender has its own pre-closure charges. You may refer to the following table to get an idea of the pre-closure charges levied by some of the popular banks in the country:

Lender

Pre-Closure Charges

Bajaj Finance

4% + GST

Kotak Mahindra Bank

5% + GST

Citibank

4% + GST

ICICI Bank

5% + GST

Fullerton

Up to 7% + GST

Axis Bank

Varies between 2% and 5% + GST

HDFC Bank

Varies between 2% to 4% + GST

YES Bank

Varies between 2% to 4% + GST

 

Disclaimer: The rates mentioned above are subject to constant change. You must always check with the lender before applying. 

Personal Loan Pre-Closure Process

You must follow the below-mentioned steps if you wish to pre-close your personal loan:

  1. Intimate your lender that you wish to foreclose your loan.

  2. Submit a formal application for foreclosure either via email or by visiting your nearest branch along with the necessary documents including your ID proof and loan documents.

  3. Following the submission, you will be asked to make the payment for the pre-closure of the personal loan account.

  4. Once the pre-closure is done, the bank will provide you with an acknowledgement letter.

  5. The final pre-closing documents will be sent to you in a few days.

Documents Required for Personal Loan Pre-Closure

You need to submit the following documents in order to pre-close your personal loan:

  • Documents pertaining to the loan

  • Proof of Identity: Aadhaar card, Driving licence, voter’s ID, passport

  • Proof of Residence: Rent agreement, passport, Aadhaar card, utility bills

  • Loan statements showing the total amount of EMIs paid to date

  • Demand draft or cheque (for payment of the due amount)

Documents You Need to Collect after Personal Loan Pre-closure

After your personal has been successfully closed, you must collect the following documents from your lender:

  • Receipt for payment of the pre-closure amount

  • NOC (No-Objection Certificate)

  • Certificate of Loan Closure

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FAQs on Personal Loan Preclosure Procedure

✔️How does pre-closure of personal loan work?

Pre-closure of a personal loan account means repaying the entire loan amount ahead of the EMI schedule. Pre-closure allows you to save on the amount that you otherwise would pay as interest over the remaining tenure. Most lenders levy a pre-closure fee in case you opt to preclose your loan account to make up for the loss of interest.  

✔️Is pre-closure of personal loan advisable?

At any point during the loan tenure, if you have surplus funds, it is recommended that you pre-close your personal loan account. This is because, unlike home loans, you do not get any tax benefits on personal loans. Moreover, preclosing a personal loan allows you to save money that would otherwise have been paid as interest.

✔️ How are the pre-closure charges of a loan calculated?

If you choose to pre-close your personal loan, you are required to pay the entire due amount along with the foreclosure charges (usually 2%-5% of the due amount + GST) as levied by the lender.

✔️ Could there be a reason why my pre-closure was halted by the lender?

You must adhere to the lender's policies if you wish to close your personal loan before the loan tenure. If the lender has put a hold on your pre-closure, you should contact them for further information. Note that most lenders only allow preclosing of a loan after 12 EMIs have been paid.

✔️How can I settle my personal loan?

You can settle your personal loan account by repaying the amount in manageable EMIs as per the decided schedule. Alternatively, if you have surplus funds, you can also choose to close your loan ahead of schedule by paying the entire due amount. In this case, however, you would have to pay a pre-closure fee to the lender.

✔️Are foreclosure charges applicable with all financial lenders?

Yes, almost all banks and NBFCs levy a foreclosure fee in case you choose to close your loan ahead of schedule. Lenders levy this charge in order to (partly) make up for the loss of interest.

✔️Which will be better for my credit score: preclosure or repaying the loan over the tenure?

Preclosing your personal loan ahead of schedule will have a positive impact on your credit score as it will show your repayment capability to the credit bureaus. Therefore, if you have surplus funds, it is advisable to opt for preclosure of your personal loan so that you not only save on interest but also improve your credit score in the process.