Personal loan closure is a crucial financial step that marks the end of your loan repayment journey.
If you’re completing the loan tenure or planning early foreclosure of personal loan, being aware of the correct procedure means you can experience a smooth and error-free closure. Knowing how to close personal loan helps avoid unnecessary charges and maintain a healthy credit score.
This guide covers the different types of loan closures and outlines the key steps and documents required to ensure your loan account is properly closed with no loose ends.
Types of Personal Loan Closure
- Regular closure: This is the most basic way to close your personal loan. Under regular personal loan closure, a borrower repays the loan amount plus the interest applicable in Equal Monthly Instalments (EMIs), and the loan is closed after complete repayment at the end of the pre-decided tenure. Regular personal loan closure happens in accordance with the terms mentioned in the loan agreement. Such a personal loan closing process does not have any additional costs or charges involved.
- Pre-closure or foreclosure: It may be possible that you acquire enough funds, maybe via higher ROIs in your business or some other reason, to pay off your personal loan sooner, which means, before the completion of the loan tenure. If under such circumstances, you wish to completely repay your personal loan and close it, you can do so. This personal loan closing process is known as pre-closure or foreclosure.
- Part-Payment Closure: Part-Payment Closure refers to the process of making an additional payment towards the principal amount of your loan, over and above your regular Equated Monthly Installments (EMIs). This is not a full settlement of the loan but a partial prepayment that reduces the principal outstanding. The primary goal here is to decrease the overall interest burden and shorten the loan tenure.
What is a Pre-closure?
A pre-closure or foreclosure is the complete repayment of your loan in a single instalment prior to the due date. Thus, instead of continuing to pay regular EMIs, you pay the pending amount in one go.
This helps you save a significant amount on the interest component and EMIs you would have paid over time. Now, before deciding to pre-close your loan, you will need your lender’s approval. In some cases, lenders charge a foreclosure penalty to compensate for the lost interest component they would have otherwise earned.
Advantages of Pre-closure of Personal Loan
If you have the means to prepay your personal loan, you can enjoy the following benefits:
- Quick process: As opposed to paying EMIs over a fixed duration of time, pre-payment relieves you of your debt in one go. You no longer have to pay EMIs every month with an added rate of interest. This helps you settle the debt quickly.
- No prepayment fees: Just like personal loan eligibility, rules and regulations regarding prepayment, fees can also vary with each loan provider. However, RBI mandates lenders to charge no extra pre-closure charges for personal loans that are on a floating rate of interest. With prepayment, you evade the additional rate of interest otherwise paid with EMIs and pay no extra prepayment fees. But if you have opted for fixed interest rates, you will have to bear the pre-closure charges for personal loan.
- Low Interest Outflow: Prepaying your personal loan partially or fully will reduce your overall interest payout on the loan. In most situations, bearing the prepayment charges is more economical than paying the complete interest on your personal loan.
- Better credit score: Your credit score is dependent on how soon you clear your debts. If you are already paying EMIs towards a loan, and require another loan in the future, your credit score may get impacted. On the other hand, pre-payment allows you to settle the personal loan and reflects positively on your credit score, increasing your chances of getting approved for another loan.
Personal Loan Pre-closure Charges
Personal loan preclosure is a great practice for saving on EMIs in the long run, but it should be done after careful consideration of the lender’s foreclosure fees. Most lenders charge a foreclosure fee to offset the early repayment, and these charges vary.
At Tata Capital, a foreclosure charge of 4.5% of the principal outstanding amount is levied. We levy this fee on the partial or complete pre-payment of a loan, including top-ups.
Documents Required for Personal Loan Pre-closure
The key documents associated with the personal loan closing procedure are as follows:
- Loan Account Number: This is like your loan’s ID. It helps the bank identify your specific loan account.
- Pre-closure Request: A formal statement or letter indicating intent to pre-close.
- Photo ID: A valid government-issued identification for verification.
- PAN Card: Necessary for all financial transactions.
- Loan Documents: These include your loan agreement and the recent statements of your monthly payments (EMIs). It’s basically a record of your loan journey.
- Payment Details: When closing your loan, you’ll need to provide specifics on how you’re making the payment. This could be a cheque or demand draft.
- NOC from Lender: Post pre-closure, confirming all dues are cleared.
What is Part Prepayment of Personal Loan?
Part prepayment of the loan refers to repaying a part of the loan amount before the due date. Part prepayment is different from pre-closure. In part prepayment, the borrower continues to pay the remaining loan amount as per the scheduled payments. However, part prepayment can help reduce the total interest payable on the loan and also reduce the loan tenure.
Reasons to Close Your Personal Loan
Closing your personal loan is a crucial step in managing your finances effectively. Here are key reasons to consider personal loan closure:
- Eliminate Outstanding Debt: Fully repaying your loan ensures you have no pending liabilities, giving you peace of mind.
- Improve Credit Score: A closed loan account reflects positively on your credit report, potentially enhancing your creditworthiness.
- Avoid Additional Interest Payments: Early closure can save you from paying extra interest over the remaining loan tenure.
What to Do After Personal Loan Closure?
Regardless of whichever personal loan closure route you take, all your transactions, including payments, defaults, etc. are recorded in your credit report. Immediately after closing your personal loan, your lender will update the details to CIBIL, based on which your future CIBIL score will be evaluated.
After repaying your instant personal loan, make sure to check with your lender whether the information has been updated to your profile. If not, submit a written request to your lender, asking to do the needful.
Conclusion
In conclusion, closing a personal loan can be done through regular closure or pre-closure. Regular loan closure of a personal loan occurs when the borrower has fully repaid the loan amount and all the associated interest charges over the loan tenor. On the other hand, pre-closure of a personal loan occurs when a borrower decides to repay the loan before the due date. Part prepayment of the loan refers to repaying a part of the loan amount before the due date.
Are you planning to apply for a personal loan? If yes, then apply with India’s leading lending institution, Tata Capital. With us, enjoy flexible repayment options, minimal documentation hassles, and personal loan interest rates as low as 11.99%. Before you avail personal loan online, check your personal loan eligibility, determine your ideal EMI using our online personal loan EMI calculator, and then submit the relevant documents.You can also download the Tata Capital App now and experience all the services of Tata Capital at your fingertips 24X7.
FAQs
Loan closure requires you to pay off the outstanding loan amount, including interest and any pre-closure charges, if applicable. Once all dues are cleared, the lender issues a closure certificate or No Objection Certificate (NOC) confirming the loan's closure.
After loan closure, the lender issues an NOC, clears your outstanding balance, and updates credit bureaus to reflect the closure. Ensure you receive an NOC, check your credit report for accurate updates, and keep all closure documents for future reference.
Yes, obtaining an NOC after loan closure is essential as it confirms that all dues are paid. The NOC ensures you're released from further liabilities and is useful for correcting any credit report discrepancies related to the loan.
Closing a personal loan can improve your credit score by lowering overall debt. If you make regular loan payments throughout your tenure, you can see an increase in your credit score after the loan closure.
Loan closure typically takes 30-45 days to reflect in your CIBIL report. It's advisable to check your credit report post-closure to confirm accurate updates and ensure the loan is marked as closed.
Yes, lenders provide an NOC for personal loans upon complete repayment. This document verifies that all dues are cleared and is essential for confirming loan closure in your credit records and resolving future disputes if any arise.
Foreclosure charges vary by lender. Based on your loan type and principal amount, some lenders waive them entirely, while others apply fees.
Yes, common reasons may include lock-in periods, incomplete documentation, outstanding dues, or lender-specific terms that restrict pre-closure within a certain timeframe. Please contact your lender to get the exact reason.
05 May 2025
7 mins read
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