Is it a good idea to pre-finance a personal loan? – Forbes Advisor INDIA

You found yourself in a life situation that required an immediate influx of money. You are budgeted and have a fixed income. How are you? You get a personal loan.

Whether you have specific goals such as buying a vehicle or property, a loan for further education or an emergency loan for healthcare or even a holiday loan – no matter what the situation, there are personal loans for all kinds of life situations.

Personal loans are great and offer amazing elasticity in terms of usage, term and settlement. They don’t have the baggage of pledging your collateral before getting a loan. Of course, lending rules and conditions differ from lender to lender, and the online space has made lending a competitive environment.

You can now avail loans in 24 to 36 hours if you fill out your application quickly and provide proof of your creditworthiness. FinTechs are the best choice today when it comes to availing personal loans because of their ability to tailor programs to the needs and requirements of borrowers.

Things You Should Know Before Getting Your Personal Loan

As a rule, personal loans are taken out for a short term; for a shorter period of time, say 60 months. Doing this entire process online allows you to choose your loan, and most lenders are quite lenient on prepayment terms. If at some point you have excess money, you can use the funds to pre-finance or prepay the outstanding personal loan. There are key advantages to pre-arranging your personal loan.

What is a pre-closure?

Many people choose loans differently, and yet when life throws them a twist, opting for a personal loan is appropriate for those situations. Many borrowers prefer to repay their loans at the earliest. Pre-closure or foreclosure is exactly that; full repayment of your loan in one installment before the due date. That is, paying the outstanding amount in one go rather than paying monthly installments (EMIs).

Advance financing helps you save a significant amount in interest and EMIs that you would have to pay over the life of the loan.

However, prepaying comes with minimal fees, so it’s always a good idea to read the terms and conditions carefully before deciding to close.

Is It a Good Idea to Close Your Personal Loans Early?

As mentioned above, it may cost you some fees, but minimal. Also, terms and conditions vary from lender to lender and even online and offline loans have different terms and conditions.

Slightly different procedures apply to online personal loans and offline loans. As for online loans, the outstanding amount will be reflected in your online account and you will receive a confirmation once the fees are paid. NOC and a Loan Completion Certificate are the final documents you need to ensure your loan foreclosure process is complete.

However, when it comes to offline loans, you definitely need to carry all the documents needed to verify your identity, such as loan amount.

The bank or financial institution may request any additional documents they deem appropriate to complete the process. Some financial institutions may even charge you a small fee for foreclosure. It would only make sense to check with the lender and get rid of all your doubts to make sure you don’t owe the lender anything else.

Once all the required documents have been provided by the borrower and validated by the lender, the financial institution will issue a foreclosure letter, which must be obtained and retained for any future transaction or reference.

Also, it is important that you get back all original documents from the lender that were submitted when applying for a loan. Once the whole process is completed, the bank will send a document, either by post or by email, confirming the completion of the loan.

Does the pre-closure affect your credit score?

no Pre-closing is basically repaying your loan before the due date. It definitely doesn’t affect your credit score. Once you have paid off your loan in full, your credit report will show the status as closed.

Do you have to pay for pre-locks?

It’s always important to do a cost-benefit analysis before making a decision and to read your lender’s terms and conditions carefully.

It would be wise to check with the lender to ensure that they have not included or added any prepayment penalties into the calculation of the foreclosure amount. Borrowers need to know that since August 2019, under a Reserve Bank of India (RBI) directive, banks and non-bank financial corporations (NBFCs) have been required to end or abolish foreclosure or prepayment penalties on floating rate term loans for non-business purposes.

Each financial institution has different lockup periods before which it is advisable to close the loan. The financial institution may even charge the borrower an upfront fee, which varies from institution to institution, and it is advisable to check this from the start.

When is a good time to pay off debt?

If you’re faced with excess funds and still have some time before you can pay off your entire loan amount, it might be a good idea to pre-finance.

Pre-closing before you approach the end of your loan term. This gives you the opportunity to enjoy some savings. Remember that the interest rate is highest at the beginning of a loan term and therefore there are more benefits to prepaying at the beginning of the term than later.

Before going into foreclosure, it might be a good idea to see if there are any potential tax benefits you could lose as a result. Remember to check if the tax refund you get from the home loan is more or less dependent on the interest burden you save by prepaying the loan.

bottom line

Once the borrower completes the foreclosure process, the lender issues a credit report that reflects the financial status and stability. It is this credit rating that lenders use to assess creditworthiness and set loan terms.

After foreclosure, the lender must update the credit report to CIBIL, where all credit records and bank statements are kept. This is a crucial step to ensure the process is complete.

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