Are You Thinking of Foreclosing Your Personal Loan? Read These Pros and Cons First - Make Money Online

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Are You Thinking of Foreclosing Your Personal Loan? Read These Pros and Cons First

You have just received a windfall gain. It could be an unexpected performance bonus or inheritance. You might have received arrears on your wage increase. It could also be the proceeds of your money-back insurance policy.

The question is, “What would you do with the money?” Your conscience says, “Close the Personal Loan and get rid of the loan obligation.” It looks like a prudent decision to foreclose a high rate of interest loan. However, consider the following points before you make the final decision.

This example should simplify matters a lot.

Disbursed Personal Loan AmountRs. 300,000
Contracted rate of interest17%
Tenure of the loan (months)60
Amount of EMIRs. 7,456
Number of EMIs paid20
Principal Amount PaidRs. 73,524
Interest paidRs. 75,592
Principal outstandingRs. 226,476
Savings on InterestRs. 71,754


Here are the Pros and Cons of foreclosing the Personal Loan –

Pros

1.       Save future payment of interest

Look at the table carefully. You will find that you have paid more interest than the principal amount during the first trimester of the loan. Foreclosing the Personal Loan now can save you the payment of future interest. You are in an advantageous position as you save a substantial amount of interest. If saving of interest is the only objective of foreclosing a Personal Loan, you should go ahead and do it. Nevertheless, you have to look at other factors as well.

2.       Sense of relief

As you foreclose your loan, you get a sense of relief. It is a fantastic feeling to be free of debt. You feel you are now in control of your finances. It gives you a sense of extreme satisfaction.

3.       Availability of disposable funds

You have decided to foreclose your loan. It frees up your EMI. In this case, you have an additional Rs. 7,456 on hand every month. You can use this disposable fund to invest in financial instruments that give good returns. You can also make an additional payment towards your existing Home Loan account. It depends on your choice whether to invest in a retirement corpus or to reduce your other current liabilities. Also, the increase in the disposable funds can get you Best Personal Loan Rates as it improves your eligibility. Anyway, you gain.

Cons

1.       Your corpus gets a dent

By choosing to foreclose your loan, you reduce the corpus you have on hand. You could have retained the corpus and continued to repay the loan in regular instalments. It would have resulted in the strengthening of your corpus towards funding your children’s education, building up an exigency fund, or even going on the dream vacation. The foreclosure of your Personal Loan makes a dent in this corpus.

2.       Prepayment penalty clause

Home Loans do not have a prepayment penalty clause. You cannot say the same about your Personal Loans. Check out the terms and conditions of your Personal Loan sanction letter. Banks mention the prepayment penalty clause (usually 1% to 2%). Paying the prepayment penalty is beneficial only when you do so in the earlier stages of the loan. One can say that it is useful in our present example. If the remaining period is less, paying the prepayment penalty is not advisable.

Check out whether your bank waives the prepayment penalty. Some banks do so. Remember to verify this condition whenever you apply for a Personal Loan.

3.       Lock-in period

Specific banks stipulate lock-in period when approving Personal Loans. Check with your bank about this aspect. In case your investment has a lock-in period of 2 years, you would not be able to foreclose your personal loan. If you wish to close your loan in spite of the lock-in period, you might have to incur a higher prepayment penalty.

4.       Credit score

Foreclosure of your loans can affect your credit score. Your credit score depends a lot on the active trade lines. Inactivity can adversely affect your credit score thereby making you ineligible to apply for the low-interest Personal Loans in the future. The reduction in your credit score forces you to look for the best Personal Loans for bad credit instead of the low-interest rate Personal Loans.

Closing a Personal Loan has its merits and demerits. You get rid of your high-interest loans and increase your disposable income. At the same time, foreclosing a loan can affect your credit score. Hence, look at all options before deciding to foreclose your Personal Loan.

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Are You Thinking of Foreclosing Your Personal Loan? Read These Pros and Cons First Are You Thinking of Foreclosing Your Personal Loan? Read These Pros and Cons First Reviewed by Lokesh kumar on 9:19 PM Rating: 5