Can you foreclose a personal loan, and what are the charges involved?

Did you raise a personal loan some time ago only to realise that you don’t need the money anymore, and want to repay now? Well, this is quite a normal thing to do. Just like everything else in life, financial circumstances also keep changing with time.

When you believe you have financial bandwidth to foreclose the loan, you are advised to opt for it.

Loan foreclosure is advisable for these reasons:

1. Lower obligation: First of all, foreclosing a loan helps you relieve yourself of financial obligation. The lower the EMI burden, the better it is for wealth generation.

2. Credit score: Another advantage of foreclosing a personal loan is that it helps you boost your credit score. The sooner a current loan obligation is cleared, the better it is for your credit score.

3. Save on interest: When you prepay the loan, you spare yourself from an additional interest cost. Although prepayment leads to prepayment charges, these are one time charges and may turn out to be lower than additional interest component in case the loan continues in future.

Charges on loan foreclosure

Typically, personal loan prepayment leads to foreclosure charges which may be as high as 3-4 percent on the outstanding principal. At the same time, some banks do not permit foreclosure in the first year of loan. Let us review how much do the big banks charge at the time of foreclosure.

ICICI Bank

ICICI Bank charges 3 percent of the outstanding principal amount at the time of foreclosure. But there are no such charges after 12 EMIs.

For part payment, one has to pay 3 per cent on the part payment amount being paid during the first 24 months. After this period, there are no part payment charges, reveals the bank’s website.

HDFC Bank

HDFC Bank charges up to 4 percent of principal outstanding when the loan is repaid within the first 24 months. When the loan is repaid between 24-36 EMIs, foreclosure charges amount to 3 percent of principal outstanding

After 36 EMIs, one has to pay 2 percent of outstanding principal as foreclosure charges.

The bank also allows part prepayment post servicing of first EMI, up to 25 percent of principal outstanding. It is allowed only once in a year and only twice during the entire loan tenure.

(Note: Raising a loan comes with its own risks. So, due caution is advised)