Foreclosure of loan, also known as loan closure refers to the process in which a borrower pays off their loan before the designated tenure. Loan foreclosure is a simple way in which the borrower can repay the entire outstanding amount, including interest, ahead of schedule. A lot of leading banks and private lenders offer loan closure facilities thus allowing the borrowers to become free of their financial obligations.
What is personal loan Preclosure?
Personal foreclosure loan is a simple way to repay the outstanding loan amount in full before the agreed-upon tenure. This option can be availed by the borrowers to settle their loans ahead of the tenure which results in saving overall cost and reducing overall interest payments. To complete the loan foreclosure, the lenders charge a pre-Payclosure fee which is a percentage of the outstanding loan amount.
Why should you consider preclosing your personal loan?
Preclosing your personal loan can offer several advantages like it allows you to save on your interest thus reducing the burden of the loan. Additionally, foreclosure of a loan can improve your credit score by eliminating the burden of monthly payments. The following are the major reasons for preclosing the personal loan.
- Interest Savings
- Financial Freedom enables one to retain funds for different projects
- Improved Credit Score
- Cost-Efficiency
- Reduced Debt Stress
Types of personal loan closures
- Regular personal loan closures
Regular personal loan closures follow the agreed-upon tenure with borrowers making fixed monthly payments until the entire loan amount is repaid. This foreclosure of a loan is the traditional way to pay the loan after the stipulated period is over.
- Personal loan pre-closure
Personal loan pre-closure involves settling the entire outstanding loan amount before the tenure ends. This can be done once the borrower pays a lump sum including the principal and interest accrued until the foreclosure of the loan date.
- Personal loan part-payment
Part-payment allows borrowers to make significant repayments at various intervals before the loan tenure is over. This pre-closure loan helps to minimize the interest accrual offering flexibility.
Understanding Pre-Closure Charges
Pre-closure charges are typically the fees that are imposed by lenders. These foreclosure loan charges are applicable only when borrowers repay a loan before the tenure. Know about the fee for the personal loan for closure in the table below.
| Name of Financial Lender | Loan Foreclosure fees |
| HDFC Bank | 2% – 4% |
| Yes Bank | 2% – 4% |
| CitiBank | 4% + GST |
| Kotak Mahindra Bank | 5% + Service Tax |
Step-by-Step Guide to Pre-closure Process in 2025
Here are some basic steps that you can follow for the Preclosure of a personal loan:
- The preclosure procedure cannot be completed online, so you will have to visit the nearest bank branch.
- Contact an executive of the bank who will guide you through the whole process of preclosure.
- You will get a preclosure form. Read the instructions on the form and fill in all the details very carefully.
- You can also be required to submit some documents like
- Identity proof
- Loan Agreement
- Bank statement of the last EMI payment.
- Cheque or Demand Draft
- Once you have submitted all the documents, you can make the payment by cheque, demand draft, or cash.
- After all the procedure is done, you will be given an acknowledgement slip, which has to be kept carefully.
Documents Required for Closing the Personal Loan
One has to submit the following documents to complete the foreclosure of the loan easily.
- Proof of address and identity: Passport, Aadhaar card, Voter ID card, etc
- Loan statements stating the EMIs paid till date
- Relevant loan documents
- Cheque or demand draft
Part Payment of Personal Loan
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What is part payment of a personal loan?
Part-payment of a personal loan refers to making a specific amount of repayment towards the outstanding loan amount before the loan tenure ends. Unlike other loan closures, in this case, one can make a partial settlement that helps reduce the overall interest burden. Unlike loan foreclosure, which involves paying off the entire outstanding amount in one go, part payment allows borrowers to make significant repayments at various intervals.
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How to make a partial payment of your personal loan?
The following are the major steps that one can undertake to complete the personal loan preclosure within the stipulated time.
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- Reach out to your lender to understand their policies and procedures for part payments. Inquire about any applicable charges or penalties
- Determine the current outstanding amount on your personal loan, ensuring accuracy and clarity on the partial payment you intend to make
- Confirm the accepted modes of payment with your lender. Whether it’s through online banking, checks, or other methods, ensure compliance with their guidelines
- Transfer the desired partial amount to the lender’s designated account using any of the payment methods like Debit Card, Credit card, Net Banking or Cheque.
What Are The Benefits Of Personal Loan Preclosure?
Borrowers can enjoy several benefits by paying off the loan amount before the end of their personal loan tenure. It offers the following benefits that can make the Preclosure of a personal loan worthwhile:
1. Saves Money On Interest:
As you have paid the principal amount of your loan before the loan tenure ends, interest will not be applied to you any further, and thus, it saves you a significant amount of money spent on interest. This reduces the overall cost of your loan by reducing the interest amount that would have accumulated over time.
2. Improves Credit Score:
When you pay off your loan earlier than the time, it demonstrates your discipline toward managing your finances. This positively impacts your credit report. It also reduces your debt-to-income ratio and, thus, increases your credit score.
3. Reduces Debt Burden:
After preclosing the personal loan, you are now free from the EMI burden. The resources used by you for the instalments of the loan can now be used for other important goals such as savings and investments.
What Are The Drawbacks Of Personal Loan Preclosure?
While Preclosure of a personal loan has benefits like it reduces debt burden and saving interest money, it also has some drawbacks:
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Prepayment Charges:
Some banks charge you for the Preclosure of your loan. This reduces the benefits of saving interest money and makes this a less cost-effective method.
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Impact On Savings And Investments:
If you are using your savings or funds from existing investments for the Preclosure of your loan, then it depletes your savings, which also affects your ability to meet emergency expenses in the future. It will be a drawback of personal loan Preclosure if you prioritize paying off your loan over your long-term financial growth.
Common Myths About Personal Loan Preclosure
There are many common myths about Preclosure of a personal loan. People need to know the reality behind these myths to make cost-effective decisions about their finances.
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Myth 1: Preclosure Always Saves Money
The Preclosure of personal loans often saves money on interest, but it is not always the case. You need to calculate the processing fees, the time of closure (early or late in the loan tenure), and the interest saved. Sometimes, if a person applies for the Preclosure at the end of their loan tenure, the interest saved will be minimal in comparison to the processing fees.
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Myth 2: Preclosure Negatively Affects Credit Scores
The Preclosure of a personal loan mostly has a positive or neutral effect on credit scores. But in some cases, if a person applies for the Preclosure just after taking the loan, it slightly lowers the credit score of that person due to reduced credit utilization.
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Myth 3: Only Big Banks Offer Preclosure Options
The Preclosure service is not limited only to big banks. This service is provided even by small banks and NBFCs. The difference can be in the terms, fees and conditions.
By knowing the reality of these myths, you will be able to avoid any misconception that can affect your financial planning and will help you to make an informed decision.
How Personal Loan Preclosure Affects Future Loan Applications?
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Understanding Credit Impact:
When you pre-close a personal loan, it usually has a positive or neutral impact on your credit report, as it depicts how financially responsible you are. But if you close a loan shortly after taking it, it can lower your credit score temporarily as it will reflect a shorter account relationship on your credit history. A fully paid loan will also show up on your credit report which will improve your creditworthiness in the long run.
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Lender Perceptions:
Usually, lenders take the preclosure of a personal loan as a sign of your strong finances and your ability to pay off your loan ahead of time. But if you repeat this frequently, it might be interpreted negatively by the lender as your inability to commit to the terms of the loan. This can affect the lenders’ willingness to offer flexible terms to such borrowers. You should ensure that your decision to preclosure aligns well with your financial future and maintains a positive impression on the lenders.
How often can I prepay my loan without incurring penalties?
The frequency at which you can prepay your loan without the lender charging any penalties totally depends on the lender’s policies. For partial premature payments, many lenders allow up to 25% of the loan amount to be paid in a single transaction and this payment is mostly restricted to one or two payments in a financial year and twice during the entire loan tenure. Due to such conditions, it is advised to ensure that prepayments are not frequent, rather they should be planned to ease your burden. Additionally, these partial payments include charges which are calculated as a percentage of the prepayment amount.
There are also many terms and conditions set by the lenders that can affect the charges or any penalties related to the prepayment of the loan:
- Lock-in period restrictions: Most lenders impose a lock-in period, during which prepayment or preclosure is not allowed (usually 6-12 months).
- The number of prepayments allowed: Some lenders set a limit on how many times you can make prepayments, it’s usually once or twice per year.
- Charges on Partial Payments: Partial payments may or may not be allowed without penalties, but some charges can be applied by the lenders on these prepayments.
- Full-preclosure penalties: Lenders usually charge preclosure fees. However, some lenders allow you to pre-close after some time in the loan tenure.
What Are The Alternatives To Personal Loan Preclosure?
If preclosing your loan does not seem to be the best option for you, then there are other alternatives available to manage your loan according to your financial conditions.
1. Debt Consolidation Loan:
A debt consolidation loan provides you the opportunity to combine your multiple loans, including the personal loan into one single loan at a lower interest rate. This helps you manage multiple loans and simplifies the procedure by replacing multiple EMIs with one single EMI. The lower interest rates reduce the burden of overall debt. This option is practical for those who have many outstanding loans and facing difficulties in managing them.
2. Balance Transfer:
A balance transfer allows the borrowers to transfer their personal loan to another lender who is offering better terms and lower interest rates. This will reduce the burden of higher interest for the remaining loan tenure and will help you to save money. This option is especially beneficial when the preclosure cost is high and balance transfer comes out to be a cost-effective option.
3. Refinance Loan:
Refinancing your loan gives you an option to replace your existing loan with a new one with lower interest rates and better terms. This option is effective for you if your financial circumstances have changed and you are burdened by the current rate of EMIs. In such cases, it allows you to restructure your loan terms according to your finances.
Tips for a Smooth Personal Loan Preclosure
The following tips should be followed to ensure smooth foreclosure of loans.
- Plan your finances to facilitate a smooth personal loan foreclosure. Having an idea of the financial condition beforehand enables you to allocate funds for the loan closure smoothly
- Before initiating the foreclosure of a loan, it is advisable to review the terms and conditions offered by the lender thoroughly. Check if there are any applicable charges or penalties ensures a transparent and cost-effective loan closure process
- You should discuss the loan foreclosure process with your lender to facilitate the process smoothly. You can talk to the lender to solve all your queries to make an informed decision
- Some loans may have prepayment charges or penalties. Confirm these details with your lender to avoid any hassle during the foreclosure process
- Familiarise yourself with the loan foreclosure procedure outlined by your lender. Knowing the step-by-step process and required documentation streamlines the loan closure making it a hassle-free experience
FAQs
- Can I repay my personal loan earlier than the loan tenure?
Ans. Yes, certain banks offer Preclosure of loan facilities earlier than the loan tenure.
- Will I be charged any fees for the foreclosure of my personal loan?
Ans. Yes, the preclosing charges to complete the personal loan formalities vary between 2 to 4%.
- How can I check the pre-closure charges for my personal loan?
Ans. You can find details on pre-closure charges in your loan agreement or contact the bank authorities.
- Can I make part payments towards my personal loan?
Ans. Yes, many lenders and banks permit partial prepayments the details of which can be confirmed by visiting the lender.
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