Nine Best Ways to Pre-Close Your Personal Loan

Understanding Personal Loan Pre-Closure

To put simply, the pre-closure of a Personal Loan means the remaining loan amount is paid off by the borrower before the end of the tenure of the loan cycle. The payment is usually done by submitting the full loan amount in one go. This is akin to lifting a burden on your chest as there is a saving on the interest. However, the lending body charges an additional pre-closing penalty to compensate for the interest income which would have come as a part of the loan. To know these intricacies in detail, let us dive into the concept of Pre-closure of a loan and know how it makes a difference to your savings.

Why Consider Pre-Closing Your Personal Loan?

Preclosing your loan has its benefits, here is why you should consider this option if you have a Personal Loan.

• Save on Interest Costs: The foremost benefit of pre-closure is that you get rid of the extra interest money which would be accrued on the loan amount. It should be noted that the interest rates are highest on Personal Loans.
• Improve Credit Score: Your credit score doesn’t get impacted if you decide to pre-close your debt. It improves your FOIR which makes you eligible for applying for loans in future. Know about FOIR in detail in this blog.
• Increase Financial Flexibility: When you tick one debt off your expense list, your monthly cash flow will get better and it will allow you more liquid funds in your hand which you can use freely.
• Reduce Financial Stress: This one goes without saying. When an individual is debt-free, it reduces their financial worries and stress that comes with it.

Best Ways to Pre-Close Your Personal Loan

Your decision to pre-close your Personal Loan is an important financial decision that should be taken with utmost planning of your funds. These are the ways to close your Personal Loan ahead of time.

1. Thorough Review of the Pre-Closure Terms and Conditions: The first point to keep in mind before taking this decision is to read and analyse your loan agreement carefully. You should make note of the given points-

• Pre-Closure Charges: The financial body that issues your loan states a pre-closure charge which is to be paid at the time of paying your loan before the decided tenure. It is recommended that this fee should be compared with that of the interest amount which could be saved with pre-closure. This calculation would determine if paying your loan early is going to be a lucrative proposition for you or not.
• Lock-in Period: Most lenders put a lock-in period for a loan, that is the time during which you cannot pre-close your loan. This time is usually between one to three years, depending upon the loan. Check if the lock-in period of the loan is over before you decide to pay your loan.

 

2. Calculate the Total Cost of Pre-Closure: It is always advised that the cost of pre-closure should be calculated beforehand. Consider this cost to understand how much would you save by closing the loan. Do a simple math with these components.

Potential Savings = Remaining Interest Cost - Pre-closure Charges

If your savings are more than the pre-closure charges, you might want to proceed with paying your debt beforehand.

3. Plan Your Finances Before Pre-Closing: When you choose to pre-close your existing loan, make sure that you do not strain your financial budget to the extent that it burns up your savings for rainy days. Remember loans are meant to ease your financial burden and not compound it incessantly. Plan your savings in a way that you have some funds for emergencies even after repaying your loans. Also, if you think that investing the amount will give you more profit and high returns, it is a proposition worth considering.

4. Opt for Partial Pre-Payment if Full Pre-Closure Isn’t Feasible: There are times when you have some extra amount in hand but it is not sufficient to pay off your loan completely. In a case like this, you can choose partial pre-payment which would pay a considerable portion of your loan amount, reducing your loan amount and the total interest too. This option is given by many financial lenders, contact your lender for more details.

5. Choose the Right Time to Pre-Close: As they say, timing is always the key. You should consider when is the right time to close your debts with the lending firm. If you are already at the end of the term of your loan, you won’t have much monetary benefit from saving the interest amount as most of the interest amount has already been paid through EMIs. On the contrary, pre-paying your loan early on in your tenure is quite lucrative.

6. Request a Pre-Closure Statement: Always request a pre-closure statement from your bank or lending body before pre-closure of your loan amount. This is an official document issued by the lender which consists of all the necessary details about your loan, interest rates, pre-closure rates and any other applicable charges. Take time to read this document in detail before applying for any pre-closure on your loan.

7. Clear Your Dues and Submit Necessary Documents: At the time of pre-closure of your loan, check for any outstanding charges including any additional penalties, interests or fees. At the time of pre-closure, you need to submit a written application about your decision to pre-pay your loan. Along with the application, all the documents like the loan agreement form, proof of identity, and pre-closure statement should also be submitted. You need to get in touch with your lending body for all the clarifications regarding your documents and the loan settlement should ideally be done physically in the lender’s office from where the loan has been sanctioned.

8. Obtain a No Dues Certificate: After you have successfully pre-closed your Personal Loan, you will receive a ‘No due’ certificate from the financial lender stating that all the dues are paid and your loan account has been closed. This is a proof of your account settlement and it should be produced if need be. This helps in keeping your credit score up, so make sure you obtain this from the bank.

9. Monitor Your Credit Report: Ensure your pre-closure is reflected in the credit report and your credit score should be updated accordingly. If there is any discrepancy observed in the report, contact your lender immediately.

Advantages and Disadvantages of Pre-Closing a Personal Loan
Here is a table with all the advantages and disadvantages of preclosing your Personal Loan.