A Personal Loan is repaid in easy monthly installments for a specific tenure. In the loan agreement, the lender and the borrower agree on points such as: loan tenure, interest rate, and installment payment date. Post signing off, the loan is disbursed.

Foreclosure or pre-closure is allowed by the bank only after the lock-in period is over; usually the lock-in period is for 12 months.

What is Loan Foreclosure?

Foreclosure is repaying the entire Personal Loan amount in one installment before the due date. The bank allows you to settle the loan account by applying for a foreclosure also known as pre-closure. But it is only allowed after the lock-in period.

A lock-in period is the number of months for which you have to pay the monthly EMIs for your Personal Loan. In most cases, the lock-in period is 12 months.

After the lock-in period, you can apply for loan foreclosure. The bank will charge you a foreclosure fee plus GST on the outstanding principal.

Types of foreclosure

Foreclosure of a loan account can be initiated by both the parties; the bank (lender) or the customer (borrower).

Bank initiated foreclosure:

When the borrower shows signs of irregularity in loan repayment or defaults on EMI payment, the lender is compelled to foreclose the loan account. In such cases, the bank will auction the borrower’s collateral to collect or to raise money equivalent to the remaining loan amount. The bank will then use this money to foreclose the loan account.

Customer initiated foreclosure:

To go debt free, borrowers do apply for a loan foreclosure. If you are looking to foreclose your Personal Loan, check the foreclosure terms with your bank before applying.

At times, you may wish to be debt free and decide to foreclose your Home or Personal Loan account. However, if you are facing some difficulties in deciding when and how to foreclose the loan, below pointers will help you to make a more informed decision.

Loan ROI – Check the applicable ROI on your loan. At times, banks do reduce the rate of interest on loans. Recently, during the pandemic, all banks reduced the interest rate on all loans by a huge margin. It is a good thing to check and compare the current ROI on the loan amount that you have availed and the interest that you are paying. Based on your findings, you can ask the bank to rework your loan ROI.

Reduce unnecessary spending – Make a budget and avoid compulsive buying and unnecessary purchases. Start saving a considerable amount from your monthly income as a loan repayment fund. Such a habit will help you to go debt free and repay your loan amount before the due date.

Use other policy maturity amount – If you have a life insurance policy that is about to mature, you can use the maturity value and the bonus received from that policy to foreclose the loan account. By doing so, you will not pay from your pocket directly and at the same time tackle debt.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.