To close a personal loan early, you can either opt for pre-closure/prepayment or foreclosure or refinance. Pre-closure of a loan refers to when you repay your outstanding balance partially and foreclosure refers to when you repay the entire outstanding balance amount of your personal loan. You’ll need to contact your lender regarding your early loan closure and submit the necessary documents, such as identity proof, bank statements. The lender would verify the documents and the borrower has to clear outstanding EMIs and pay foreclosure or pre-closure charges.
Once you pay the outstanding dues and the loan has been closed, the lender will issue you a payment receipt, No Objection Certificate (NOC), acknowledgement letter and other documents.
What To Do Before Closing a Personal Loan Early
Check for the cooling period
Some lenders put a lock-in period on the foreclosure/pre-closure until the borrowers repay a set number of EMIs. For instance, IndusInd Bank and YES Bank allow foreclosure of the personal loan only after the repayment of 12 EMIs.
Use online prepayment calculators
Use online prepayment calculators to accurately calculate your net savings. Consider prepaying your loan only if there is a significant interest cost savings after taking foreclosure fees (or additional expenses) into consideration.
Know foreclosure/pre-closure charges
Lenders levy prepayment charges on closing a personal loan early. The personal loan foreclosure charges can usually go up to 4% of the outstanding principal amount. Note that lenders are not allowed to levy charges on personal loans availed at floating interest rates.
Decide between investment and foreclosure
Check whether the returns from your investments exceed the interest cost savings made through foreclosure or prepayment. If the returns are higher, the borrower should consider investing when they have surplus funds to foreclose.
Calculate your emergency fund
Your emergency fund should cover a minimum 6 months of your monthly expenses, such as utility bills, insurance premiums, rent, education fees of your child and loan EMIs. Don’t dip your emergency fund to foreclose or else in times of financial emergency, you to have to either apply for new loans, probably at higher interest rates or liquidate long-term investments.
How to Close a Personal Loan Early
- Inform your bank/NBFC of the early closure of your personal loan. The lender may ask you to submit a written request or fill out a form for foreclosure or pre-closure.
- The following documents are usually required for foreclosure, depending on the lender:-
- Personal Loan Account Number: You can get it from your loan statement or via online banking.
- Identity Proof such as Aadhaar card, PAN card, Voter ID Card or passport.
- Loan approval letters, loan statements and other loan-related documents.
- Pay the outstanding dues, including foreclosure charges and GST applicable. You’ll get an acknowledgement or receipt for the outstanding balance amount paid.
- The lender will also issue a loan closure certificate or a NOC which confirms that there are no outstanding loan amounts.
- Check your credit report after a month from personal loan closure to check that the loan account is marked as closed.
Personal Loan Balance Transfer
You can transfer your personal loan to another lender at a lower interest rate, for a longer/shorter tenure and for better terms. This would lead to lower interest costs that would help you to repay the loan quickly with the new lender. But make sure to factor in the loan transfer charges, etc, levied by your current lender and processing fees, stamp duty, etc, charges by your new lender to calculate cost savings on personal loan balance transfer.