What is loan foreclosure?
As we know well by now, an outstanding loan demands an EMI (Equated Monthly Instalment). However, in a scenario where the loan borrower can arrange for a lump sum amount, he/she can choose to repay the entire loan amount at a go before the actual due date and thus become financially debt free instead of having to pay regular EMIs over a long period of time.
Thus, the full repayment of the balance loan amount in a single payment before the scheduled Equated Monthly Instalment (EMI) period is known as Loan foreclosure. For loan foreclosure, the loan borrower has an option to choose the number of Equated Monthly Instalment (EMIs) to be paid as well as the month in which he/she wishes to foreclose the remaining loan amount. This pre-planning will help in the calculation of the loan foreclosure amount.
Let us understand what is a Business Loan Foreclosure Calculator?
A Business Loan Foreclosure Calculator is used in the calculation of your balance loan foreclosure amount as well the interest saved as a result of loan foreclosure. So a Pre-payment Calculator basically helps you in evaluating the effects of early repayment of the pending loan amount on your finances like your tenor, resultant EMI etc.
How to use the foreclosure calculator?
Calculating the foreclosure loan amount with the help of a foreclosure calculator is a simple process that aids in the calculation of the pending balance of the loan amount along with the interest payment by calculating pending installments. A foreclosure calculator does the pre payment calculations based on the below details:
- Your total loan amount as well as the pending balance loan to be repaid
- The loan tenure
- Rate of interest at which the loan was borrowed
- The total number of EMIs (Equated Monthly Instalment) already cleared
- The foreclosure month
- Any charges or costs to be incurred in foreclosure of the loan
The foreclosure calculator will consider all of the above factors and calculate the final amount that is to be paid by the borrower in the pre payment process.
Eg: You have taken a loan of Rs 100000 for a tenure of 5 months @ 5% interest and after paying the first EMI, you wish to foreclose your loan in the 2nd month, your foreclosure amount will be:
|Monthly EMI||Rs. 20,251|
|Foreclosure Amount||Rs. 1,00,417|
What is the foreclosure month?
The foreclosure month is the month in which you repay the entire balance loan amount at a go before the stipulated due date.
For e.g.: if the loan tenure is 5 years i.e. 60 months, but you choose to pre pay the entire balance loan amount after 3 years itself i.e. 36 months, then the 36th month will be considered your foreclosure month.
Penalty charges for foreclosing a loan?
When the borrower decides to pre pay the balance loan amount at a go, he/she is liable to pay a certain percentage of the outstanding loan amount as foreclosure charges, which is also called pre payment penalty. While the foreclosure charges are different for different banks and financial institutions, it usually varies between 2% to 5% plus the applicable taxes.
The lender charges this penalty to compensate for the lost interest income due to the pre closure of the loan. Hence, it is important that you calculate the pre payment penalty and carefully evaluate your financial position before taking the decision of foreclosing your outstanding loan in order to minimise your pay out.
Foreclosure Procedure – a step by step complete guide
Though the pre payment procedure is slightly different for every bank and financial institution, the basic process, as explained below, remains the same:
Step 1 – Find the nearest branch
Since foreclosure of loan cannot happen online, you will first need to locate the nearest branch of the bank or financial institution from where you have borrowed the loan. You can contact the bank/financial institute’s customer care team for the same.
Step 2 – Submit an application
You will need to write and submit an application for the foreclosure of your loan by submitting the pre closure form.
Step 3 – Submit all the required documents
The next step of the foreclosure procedure will be to submit all the necessary documents as listed by the bank or financial institution:
- Personal identification proof; PAN card, Aadhar card, Driving license or Passport
- Loan documents
- Loan account details
- Bank statements as proof of last EMI payment and clearance.
Step 4 – Pre payment of the outstanding loan
Once all the documents have been duly submitted, the bank/NBFI will calculate the balance loan amount to be paid after considering the EMI and interest paid thus far, the applicable foreclosure charges and taxes as well as the date of pre payment of the loan and communicate the same to the borrower. The borrower then has to clear the outstanding dues through cheque, demand draft or online transfer in the form of NEFT or RTGS.
Step 5 – Receipt of documents
Once all the pending dues have been cleared by the borrower, the bank or financial institution will proceed with the foreclosure formalities which includes stopping all EMI instructions and reminders, returning all original documents within 10 – 15 business days and handing over the below documents to the borrower:
- Acknowledgement letter
- Pre closure payment receipt
- No dues certificate
- No Objection Certificate to close the personal loan
- Loan closure certificate.
Step 6 – Inform the credit rating agencies
Once all the foreclosure formalities have been successfully completed, you must inform credit rating agencies about the pre payment of your loan, so it can be updated in their records.