What is Loan Foreclosure –Business Loan, Home Personal, Car Loan India

Buying things with a loan is quite common nowadays. You may not have all the money to pay upfront for an item that you want to purchase, and in such times bank loans are quite helpful. Banks provide loans with an interest rate that is either fixed for the entire loan term or gradually reduced with the reduction in the outstanding amount. In any case, you have to pay significant interest charges, and it can delay your financial freedom.

Many times people buy things on loans, and then there’s a time when they have enough money that they can afford to get done with the loans at once. In such times, people opt for Loan foreclosure. It is a legal process that helps borrowers to get rid of their debt by paying all outstanding balances at once and getting a confirmation from the lender about the same. In utter simple words, it is the repayment of the loan before the tenure maturity.

When you repay the loan for your home, car, or personal loan before maturity, it means you have foreclosed the loan. There are charges involved with loan foreclosure, and they vary from lender to lender. 

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Types of Loan Foreclosure

Foreclosure By Borrower

In this type of foreclosure, the borrower pays up the entire outstanding amount at once and closes the loan before its maturity period. This shortens the loan tenure and also increases the credit score of the borrower. 

Foreclosure By Lender

This type of foreclosure is miserable. When a borrower is defaulting on his loan payments regularly, and there is no other way for a lender to get his money back from the person, such loan foreclosure is performed. Here the lender closes the loan by taking the item given as a guarantee and writes off the difference amount. If the loan was unsecured, the borrower adds the amount to his NPA and can go for legal action. Such foreclosure is complicated, and it impacts the person’s credit history significantly.

Having known about the types of foreclosure, it is better to have a look at the different types of loans that can undergo foreclosure.

Types of Loans That Offer Foreclosure

Business Loans

Business loans are mainly unsecured loans with higher capital investment. Such loans are granted based on the idea of business, project approvals, or based on predictions of growth for the business. Foreclosing business loans is pretty standard for established companies. Doing so helps them to raise capital from investors and build trust in the market by being debt-free. Moreover, that allows business owners to save and manage their business funds better.

In practice, business loans have significantly high foreclosure charges because of their nature. The foreclosure charges for such loans are calculated on the outstanding amount. So, if you have paid a big chunk of the loan already, foreclosure charges might not be very high.

Different banks and lenders have different foreclosure charges; hence it is wiser to have a look at your loan documents to understand foreclosure charges perfectly.

Personal Loans

Today personal loans are taken for anything and everything. People go on vacations or do something important anytime with the help of a personal loan. Moreover, getting a personal loan has become relatively easier than ever before.

Personal loans have hefty fixed interest rates, and similarly, they also have significant foreclosure charges. If you’ve taken a personal loan and you want to close it now, paying a foreclosure charge is better than paying double-digit interest rates every year.

Home Loans

Buying homes without loans is complicated. Average Indian person buys a home with a loan at an early career stage, and as they advance their career and start earning and saving more, they think of home loan foreclosure. Such foreclosure is exclusive to home loans. Home loans are always at very low rates, and there’s the same story with their foreclosure charges.

Home loan foreclosure charges are pretty low. Moreover, foreclosure of a home loan helps you to own your house exclusively.

Car Loans

Car loans are dispersed quickly, and everyone buys a car with a loan even though they have the money. For business people, it is better as they can use the money somewhere else, and for salaried persons, getting a car on loan provides tax benefits.

In both cases, if a person has spare money, he can choose to foreclose his car loan whenever he sees fit. By paying a minor foreclosure charge on car loans, you can get the hypothecation on your RTO papers removed and drive your car stress-free.

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Having known about the different loans that can be foreclosed, let’s discuss a vital topic. Whether to foreclose or not?

To Foreclose or To Not To Foreclose? 

Loan foreclosure can bring several benefits to your way. You can free yourself from the monthly payments and interests that take your money from you and use that saved money for other purposes. However, the other side is worth looking at too. Opting for Loan foreclosure means you will have to shell out a chunk of money at once, which may lead to a cash crunch. In some cases, you might end up paying more money while foreclosing on a loan rather than paying it back in the stipulated period.

Another benefit of loans is that you can claim interest payments and reduce your tax liabilities. But if you are someone who does not have substantial tax liabilities, then foreclosing is fine as it won’t make much difference in your tax liability. If you are looking to foreclose your loans, it is ideal to calculate the amount you can save on interest payments if you prepay the loan and subtract foreclosure charges from it. Go for foreclosure only if there are significant benefits.

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