Meaning of foreclosure of loans
When you borrow a personal loan from a financier, the tenure of the loan is pre-defined. However, there may be times when you wish to make an advanced payment on the loan, due to a surge in income. Payment of the entire outstanding amount before the actual tenure is completed is known as foreclosure of loans. All the outstanding EMIs then stand cancelled and you are relieved of your debt.
Reasons for foreclosure
The reason for foreclosing a loan is mainly due to surplus of money. You may sometimes receive an excess flow of cash due to a sale of an asset such as a house or a car. Besides, you may also receive a huge bonus amount from your employer. Additionally, an investment such as a fixed deposit or insurance plan may reach maturity, thereby providing you with adequate funds to prepay the loan amount in full. You may also foreclose a loan in case you do not wish to pay EMIs any longer. Doing so helps to save significant amount of money as you no longer need to pay interest on the outstanding amount.
Most banks and Non-Banking Financial Companies (NBFCs) levy a foreclosure fee if you wish to clear off your debt in full. This is because financiers rely on interest as their profit margin. If the loan is closed before the completion of the tenure, financiers lose out on their profits. Thus a foreclosure fee is charged to recover the losses associated with early payment of the loan.
Making the right choice
It is necessary to assess if foreclosing the loan is a financially viable decision. You may believe that clearing off your debt in one go will help you save a significant amount of money. However, it is important to consider the cost associated with foreclosure. You may conduct a cost-benefit analysis and accordingly make the right choice.
If foreclosing a loan does not seem to be profitable, you may consider other alternatives like deploying your extra funds elsewhere. You may invest in equity markets or any other high-yield investment options. You may also transfer your current loan to another lender who offers a lower interest rate. Even if there is a minor difference in the interest rate, you may make significant savings if the loan amount is huge. However, it is again necessary to conduct a cost-benefit analysis as such a measure involves some extra charges as well as processing fee.
You may, therefore, make a decision based on various factors like interest rate and loan tenure. Assess all your options carefully and foreclose the personal loan only once you are assured that such a measure is a profitable one. Moreover, you may also seek advice from a financial expert in case of any doubts.