Closing a loan early means it’s a sign that you are going in the right direction of financial discipline. You save interest, and burden on loans and make a great step towards your financial goals. However many people don’t have exact knowledge about how they can close their personal loan before the due date. Let’s understand here.
Before diving into the process, it’s really important to understand the different types of loan closure:
Regular Closure: This means the loan is fully paid off by the end of the agreed period, and all monthly payments have been made.
Pre-Closure or Foreclosure: This means paying off the entire remaining loan amount all at once before the end of the loan period.
Part-Payment: This means making a payment bigger than your usual EMI to lower the amount you owe. It won't pay off the loan completely but can shorten the loan term and reduce the interest you pay.
Interest Savings: The longer you take to repay a loan, the more interest you’ll pay. Paying off the loan early can help you save a lot on interest.
Improved Credit Score: Paying off a loan early can improve your credit score because it shows you manage your finances well.
Debt-Free Life: Early closure helps you reduce your debt burden, giving you peace of mind and financial flexibility.
Why It’s Important: Your loan agreement will contain all the details regarding pre-closure, including any penalties, charges, and conditions.
Review your loan agreement carefully to understand the pre-closure terms.
Check if your lender allows pre-closure and if there are any lock-in periods.
Identify any pre-closure charges or penalties, which typically range from 2% to 5% of the outstanding loan amount.
Why It’s Important: Knowing the exact amount you need to repay is really important for planning the pre-closure.
Contact your lender or check your loan statement to find out the outstanding principal.
Calculate the total amount required to close the loan, including any pre-closure charges.
Use an online loan pre-closure calculator to estimate the total savings and costs.
Why It’s Important: You need to have enough money to pay off the entire remaining loan balance all at once.
Evaluate your savings, fixed deposits, or other investments that you can liquidate.
Consider using a bonus, inheritance, or any unexpected windfall to fund the pre-closure.
Avoid taking another loan to close the existing one, as this defeats the purpose.
Why It’s Important: Paying off a loan early requires following a detailed process carefully.
Visit your lender’s branch or customer service office with the necessary documents (loan account number, ID proof, etc.).
Submit a written request for pre-closure of the loan.
Pay the outstanding amount via cheque, demand draft, or online transfer as per the lender’s instructions.
Why It’s Important: The NDC is a really important document that confirms the loan has been fully paid off and there are no further dues.
Make sure you receive an NDC from the lender once the pre-closure payment is processed.
Verify that the NDC includes all the necessary details like loan account number, closure date, and lender’s signature.
Keep the NDC safe, as it might be required for future reference or credit report corrections.
Why It’s Important: After you pay off your loan, make sure your credit report shows that the loan is closed.
Check your credit report after a few weeks to confirm that the loan closure has been updated.
If the closure is not reflected, contact your lender to correct the discrepancy.
Monitor your credit score regularly to see the impact of the loan closure.
| Steps | Action Required |
|---|---|
| Review Loan Terms | Check the loan agreement for pre-closure terms, penalties, and conditions. |
| Calculate Outstanding Amount | Determine the total amount needed, including principal and pre-closure charges. |
| Arrange Funds | Secure the necessary funds from savings or other sources without taking another loan. |
| Initiate Pre-Closure | Visit the lender, submit a request, and pay the outstanding amount. |
| Obtain NDC | Collect the No Dues Certificate from the lender to confirm loan closure. |
| Update Credit Report | Ensure your credit report reflects the loan closure and monitor your credit score. |
Paying off a personal loan early can be a good financial decision, but you need to plan carefully. Understand how to close the loan, figure out how much you might save, and consider the pros and cons to make a choice that fits your financial goals.
Key Takeaway: Before paying off a personal loan early, check your financial situation and any costs involved to make sure it’s the right decision for you.
It depends on the lender and the terms of your loan agreement. Some lenders may allow pre-closure without penalty after a certain period, while others may charge a fee.
Compare how much interest you'll save by paying off the loan early with any fees for doing so and look at your overall finances. If the savings are greater than the costs, paying off the loan early might be a good choice.
Using your savings to pay off a loan early can save you interest, but make sure you still have enough money left for emergencies. Don’t use all your savings just to pay off the loan.
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