What Is Prepayment Of Loan?

Prepayment is a loan repayment option that allows you to return your loan in part or in whole before the end of the loan term. It enables you to invest any excess cash into your loan account. It decreases the total outstanding principle, lowering the interest burden through EMIs or by shortening the loan's remaining term in exchange. This is frequent among borrowers who receive a regular annual bonus or other type of yearly incentive at work.

Online, you can make partial payments into your loan account from other accounts. Because loan interest is computed on a daily decreasing balance, the interest and EMI will be changed depending on the most recent outstanding amount on your loan account.

What Is Foreclosure Of A Loan?

Foreclosure is a legal procedure in which the borrower repays his obligation in full before the loan's term expires. This enables them to drastically reduce their interest burden and close the loan account well before the loan's term expires.

To foreclose a loan, one must file an application to the appropriate bank or lending institution. The lender will calculate the foreclosure sum based on the total outstanding obligations, interest paid, and remaining duration of the loan and provide you with an estimate. You can pay the sum and close the loan if you are happy with the computation. Remember to get the original paperwork, the no-dues certificate, and any other documentation you may need from the bank or lending institution.

Prepayment Or Foreclosure Charges

According to a new RBI guideline dated August 2nd, 2019, banks and NBFCs have been directed to eliminate the Foreclosure/Prepayment penalty costs for variable interest rate term loans granted to individual borrowers (with or without co-applicants) for non-business purposes. As a result, the borrower must ensure that the lender has not included any prepayment penalties in the computation of the foreclosure amount.

Why Should You Go For Prepayment Or Foreclosure?

Whether one chooses to prepay or foreclose on their debt, it is unquestionably beneficial in the long term. Both of these services assist thousands of borrowers, who may utilise whatever extra cash they have to pay down previous obligations and gain some relief from the high-interest rates on their loans. That is especially true in India, where the concept of being indebted is often regarded with disdain. Closing their loan account is highly favored. Prepaying or foreclosing your loan account might provide you with the following advantages:

Why Should You Go For Prepayment Or Foreclosure?

Whether one chooses to prepay or foreclose on their debt, it is unquestionably beneficial in the long term. Both of these services assist thousands of borrowers, who may utilise whatever extra cash they have to pay down previous obligations and gain some relief from the high-interest rates on their loans. That is especially true in India, where the concept of being indebted is often regarded with disdain. Closing their loan account is highly favored. Prepaying or foreclosing your loan account might provide you with the following advantages:

• Reduce the loan's total interest liability. Borrowers pay about 100 percent of the principle amount as interest on a 20-year home loan with an average ROI of 10.5 percent. You can lower this massive interest expense by prepaying or foreclosing.
• It improves your credit score. Though it may not appear to be a difference at first, foreclosing on a loan will have a long-term impact on your credit score owing to your repayment history.
• Prepayments on house loans are tax deductible since they represent, in essence, payback towards the principal amount of the loan. This will result in a larger tax rebate in the year in which you make even a partial payback on your loan.
• You can choose to shorten your payback period, allowing you to become debt- free sooner than planned.
• Prepayments do not have to be made only once. You can make many instalment payments on your loan. This enables you to make prepayments anytime you have additional cash on hand.

Things To Do After Foreclosing A Loan

Remember to follow up on the following activities once you have Remember to follow up on the following activities once you have foreclosed on a loan:

Updating your credit report –Banks or NBFCs should notify the credit bureau that your loan has been closed so that your records may be updated. This process might take up to 30 business days. To avoid future problems, it is your job to follow up with the lending institution and ensure that this information is corrected on your credit report. Many incidents have been documented in which the credit report was not updated for years, negatively impacting the borrower's credit score.

Remove the lien on the property –When a house loan is paid off, the borrower must ensure that the lien on the property is erased at the Registrar's office. The borrower will be unable to sell the property if this is not done.

Obtain the original property paperwork as well as any other applicable documents from the lender — Collect the original property papers, NOC, Encumbrance Certificate, and a written confirmation from the bank regarding the loan's closure.