What is Loan Foreclosure?
Loans help you fulfil your dreams of making big purchases like buying a car, home, or even some consumer products. While loans break down significant expenses into smaller monthly EMIs, the interest charged on the loans makes the product more expensive than it usually is.
However, as you grow in your career, your income levels also increase with the job promotions or bonuses. With the extra money, you can consider living a debt-free life by foreclosing your loan and saving up on the extra interest you would’ve had to pay with the EMIs.
Loan foreclosure is the complete and final repayment of your remaining loan in a single payment, instead of paying smaller portions every month with interest.
But, how do you compute the remaining amount you need to pay to foreclose your loan?
Here’s where a loan foreclosure calculator comes into the picture.
With loan foreclosures, banks lose the interest they would’ve otherwise earned. Therefore, some banks charge a specific interest (around 4%) as foreclosure charges for closing your loan in advance. However, to avoid the hefty interest charges every month, this is a small amount to pay to avoid the hefty interest charges.
Based on a few details of your loan, you can quickly compute the foreclosure charges and determine the exact amount you need to pay for the foreclosure of your loan.
Loan foreclosure calculators can help you understand how much you’ll need to pay today to end your loan and how much interest you will be saving.
How is the foreclosure amount calculated?
You will need to enter the following details in your :
- The pending loan amount
- The loan tenure – in months or years
- The applicable rate of interest (per year)
- The total number of EMIs you have already paid
- The month in which you wish to foreclosure the loan. For example, if you use a car loan foreclosure calculator to repay your car loan after five months, the month you foreclose will be 5. It is called the foreclosure month. If you prepay the loan after one year and seven months, your foreclosure month is 19 (12+7). Some calculators ask you how many EMIs you have paid to assess the foreclosure month.
- Any charges that your bank applies on the foreclosing of the loan. You can find it in your loan documents.
Here are some loan foreclosure tips that will help you:
These tips will come in handy when you begin your loan foreclosure planning and process.
Contact your bank:
Contact your bank’s customer care; It will help you address any concerns and enter the correct details into the personal loan foreclosure calculator or other loan foreclosure calculators.
Keep your KYC handy and File an Application:
Once you have used the foreclosure loan calculator and know how much you need to pay to foreclose the loan, apply with your bank to start the process. You might also have to submit your details like the PAN Card, Aadhaar Card and loan documents as part of the application, so keep them handy.
Collect all documents:
Don’t forget to collect these documents as proof of completing all loan repayments:
- Acknowledgement letter from the bank that you have repaid the entire loan
- No dues certificate from the bank stating that you don’t have to pay any more payments
- Pre-closure payment receipt for the final amount paid
- Loan closure and no objection certificate from the bank
Don’t forget to stop all existing standing instructions and reminders for EMI repayments.
Credit Scores:
A good credit score gives you the option of better interest rates, better offers and rewards on cards, quicker approval on future loans, and many more benefits! By repaying the loan, your credit score is bound to increase. If it is not automatically updated, ensure to inform the credit rating agencies and enjoy the benefits of a high credit score.
Understanding the loan foreclosure calculations and charges:
The key to practical calculations – Your loan documents
Be it a personal loan or a home loan; your loan documents contain all the details required to effectively calculate the home loan foreclosure charges or other foreclosure charges.
Some financial institutions take loan foreclosure charges only if the loan is repaid during the initial few years. For example, some home loans come with zero pre-closure charges if the home loan is paid after five years of consistently paying EMIs.
Why do banks do this?
Most of them recover a large portion of the interest within the initial few years, and the principal amount remains largely unpaid. It becomes easier for them to forgo the penalty for foreclosing on the loan.
It is also easier for individuals to save or invest money and repay the loan later.
The prepayment charges can be in either of the two forms:
- Fixed Prepayment Penalty – A fixed-rate applied to the loan repayment amount will be charged as a penalty for foreclosing the loan. If the fixed rate for foreclosing is 4% and the principal amount outstanding is Rs. 5,00,000, then the prepayment penalty will be Rs. 5,00,000 * 4% = Rs. 20,000 for each year left to be repaid. If the tenure left for repayment is six months, the penalty will be Rs. 10,000 (Rs. 20,000/2), and if the tenure left is two years; the penalty will be Rs. 40,000.
- Interest Differential Method – If your current interest rate is different from the initial interest rate, this method can be applied. To understand this with the help of an example, let us consider a car loan of Rs. 25,00,000 with the initial interest rate of 9% and a principal balance amount of Rs. 10,00,000. The current interest rate is 7%. The prepayment penalty, in this case, will be Rs. 10,00,000 * (9% – 7%) = Rs. 20,000 for each year left to be repaid.
Therefore, if you are foreclosing this year two years in advance, your pre-closure penalty will be Rs. 40,000 with the interest differential method.
A loan foreclosure calculator considers all of these charges to give you the exact amount you will have to pay to foreclosure your loan in any month.
Benefits of Loan Foreclosure Calculator:
- Ease of computation and a hassle-free experience
- 100% privacy of details entered
- Fast calculations at any time
- Extremely useful while planning your loan repayments
- No limits on usage. You can enter and change as many details as you wish to arrive at the best solution for you.
Frequently Asked Questions (FAQs)
Can the financial institutions reject my application to foreclose?
Yes! If you do not submit proper documentation or adhere to the terms and conditions, the financial institution might reject your application.
Does foreclosure increase my credit score?
Yes! Any form of repaying loans increases the credit score.
Can I apply for foreclosure anytime after taking a loan?
If it is a one-year lock-in period on your loan, you cannot apply for foreclosure during that lock-in period.
Why should I foreclose my loan?
You can save interest and live debt-free by foreclosing your loan if you have the funds.
I have a very short tenure left, and I can repay my loan now. Should I do it?
By opting for a foreclosure, you save on interest charges. With a small tenure left, your interest charges might be less, and therefore your savings would also be lesser. However, with the help of loan foreclosure calculators, you can assess the actual savings you will be making.
Parting Thoughts:
Now that you know how to calculate the foreclosure charges, ensure you read the fine print while opting for any loan and plan your repayment accordingly. If you have an existing loan, use the loan foreclosure calculator to assess how to save on interest and enjoy that pizza with ease!
In the same way, you can also opt for a partial payment against the principal amount to reduce the interest burden.
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