Personal Loan

What Are the Key Differences between Foreclosure and Preclosure of Personal Loan


The popularity of personal loans has grown due to the flexibility they offer borrowers. The money you borrow under a personal loan can be used for any purpose, which is not the case when you take out a car or housing loan. Along with the flexibility, personal loans also come with a relatively shorter repayment tenure and a significantly higher interest rate. It is because a personal loan is an unsecured loan. Thus, the risk involved is high.

Due to high interest rates, many borrowers choose personal loan foreclosure. It allows them to save quite a bit, as they no longer have to pay interest.

What is Personal Loan Foreclosure? 

It is called personal loan foreclosure when you decide to pay off your entire personal loan before the end of the term. Foreclosure allows borrowers to save the money they would have spent on interest payments. At the same time, it reduces the burden of debt as the entire amount, including all the EMIs, is paid off in one go. 

However, personal loan foreclosure can happen only after a fixed period from the date of sanctioning the loan. A borrower can’t foreclose a personal loan during this period. The period varies from lender to lender, and some lenders do not have any foreclosure period. 

Additionally, borrowers will have to pay the penalty if they wish to foreclose a personal loan. When you pay off the loan in full, the bank will not get any interest payments. As a result, it will lose out on revenue. Therefore, a penalty has been mandated to discourage borrowers from paying off their debt before the end of the term. 

What is a personal loan preclosure? 

Personal loan preclosure is an alternate term for personal loan foreclosure. The prefix “pre” before the word “closure” signifies the end of the loan before the term limit. These terms are used interchangeably. However, the term personal loan foreclosure is much more common. It is regularly used in financial dailies. It is also part of the jargon used by financial executives. You will find the term regularly used in financial documents.

Given that these terms denote the same thing, there is no difference between the two. As stated, when it comes to a personal loan, both mean the end of a loan before the term limit. 

Advantages of Personal Loan Foreclosure 

Advantages of paying off a personal loan before the end of its tenure:

Lower interest cost

By paying off the loan early, you can save on the interest that would have been charged on the remaining unpaid balance. This can result in significant savings, particularly if you have a high-interest loan.

Improved credit score

Paying off a loan early can improve your credit score by showing that you can manage your debts responsibly and make timely payments. This can make it easier for you to get approved for future loans or credit cards.

More financial flexibility

Once you pay off your personal loan, you will no longer have to make monthly payments to your lender. It will free up your cash flow, giving you more flexibility in managing your finances.

Reduced stress

Carrying a significant amount of debt can be stressful. Paying off a loan early can bring a sense of relief and financial freedom.

How Personal Loan Foreclosure Works

To close the loan, you would need to pay off the remaining balance on the loan, which can typically be done by making a lump sum payment to your lender.

Before making the payment, it’s important to check with your lender. This way, you can find out the exact amount that you owe. It will help ensure you have the funds to repay the loan. You should also ask your lender about any fees or penalties for paying off the loan early. These can vary depending on the terms of your loan agreement.

After the payment and the loan have been paid off in full, you should receive a confirmation. Your lender will notify you that the loan has been closed. It will prove that you are not obligated to make any further payments. This confirmation can typically be provided as a letter or statement.

Documents Needed for Personal Loan Foreclosure

For loan foreclosure in India, you need the following documents:

  • A written request to close the loan, stating the reason for closing the loan and the date on which you would like the loan to be closed.
  • A copy of your loan agreement, which will include the terms and conditions of your loan. 
  • Proof of payment for the remaining balance on the loan, such as a bank statement or check stub showing the payment.
  • Any other documents your lender requires, such as proof of income or identity.

It’s important to check with your lender to confirm the documents they require for closing a personal loan. Lenders may have different requirements, so it’s best to get this information directly from them.

Effects of Personal Loan Foreclosure on Your Credit Score

Paying off a personal loan before the end of the loan term can positively affect your credit score. When you pay off a loan early, it shows that you are financially responsible and able to manage your debts effectively. This can improve your credit score over time.

It’s also worth mentioning that since closing a personal loan early can sometimes result in fees or penalties, it could offset any potential positive impact on your credit score.

Summing up

Given the high interest rates on personal loans, most borrowers want to pay off their debt as soon as possible. This helps them save money that they would otherwise pay in interest. It also gives them the ability to take out more loans. However, there are numerous terms and conditions that a borrower must meet in order to avoid personal loan foreclosure. These include the full payment of pending EMIs, among others.

If you are planning to go for personal loan foreclosure, refer to more blogs like this on Piramal Finance. You may also check out the financial services they offer.