What are the Loan Pre-Closure Charges

31 July, 2024

Synopsis

• You can foreclose a Personal Loan if you have surplus funds and the lender allows it.

• Banks may charge pre-closure fees when you close a Personal Loan in advance.

• The pre-closure charges depend on how soon you chose to close the loan.
  
  

Personal Loans are a popular financial product if you need funds to address immediate financial needs like medical emergencies, home renovations or wedding expenses. Sometimes you may find yourself in a position that allows you to close your loan ahead of schedule. When you exercise this option, the lender levies a pre-closure charge. This article explains what pre-closure charges are.

What Are Pre-Closure Charges?

Pre-closure charges for Personal Loan are the fees or charges levied by banks and Non-Banking financial institutions (NBFCs) when a borrower chooses to repay their outstanding loan amount before the stipulated end of the loan tenure. These charges can vary significantly across different lenders and are usually expressed as a percentage of the outstanding loan amount.

Why Do Lenders Impose Pre-Closure Charges?

Following are the key reasons why Personal Loan pre-closure charges are levied:

• Loss of Interest Income
  
  The primary reason for imposing pre-closure charges is to compensate for the loss of interest income that lenders would incur if the loan is paid off early. Personal Loans are typically structured so that the lender earns a significant portion of the interest in the early years of the loan tenure. When you repay the loan early, the lender loses out on this expected income.

• Operational Costs
  
  Processing a loan involves various operational costs, including administrative, legal and processing fees. Lenders may include pre-closure charges to cover these costs and to discourage you from frequently closing and reopening loans.

• Liquidity Management
  
  Banks and financial institutions generally manage their liquidity based on the expected inflow and outflow of funds. Early loan repayments can disrupt these cash flow projections, necessitating the need to impose pre-closure charges.
  
  

Factors to Consider Before Pre-Closing a Loan

Before deciding to pre-close a Personal Loan, you should carefully evaluate these factors:

• Comparison of Costs: Calculate the total cost of keeping the loan versus the cost of pre-closing it, including any pre-closing charges for the Personal Loan and the remaining interest.

• Financial Goals and Stability: Consider your overall financial goals and current financial stability. If pre-closing the loan leaves you cash-strapped, it may not be the best decision.

• Alternative Investments: Assess if the funds intended for pre-closure could be better utilised elsewhere, such as investments in securities that offer higher returns.

• Lender Policies: Review the pre-closure policies of your lender, including the exact charges and any conditions or penalties that may apply.
  
  

Pre-Closure Process

The process for pre-closing a Personal Loan involves several steps:
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1. Request a Pre-Closure Statement:
   
   Contact your lender to request a pre-closure statement, which outlines the details of the outstanding loan amount, accrued interest, and applicable pre-closure charges.

2. Prepare Documentation:
   
   Gather the necessary documents, such as identification, loan account details and the pre-closure statement.

3. Make the Payment:
   
   Arrange for the payment of the outstanding loan amount plus any loan pre-closure charges. This can usually be done via bank transfer, cheque or other methods specified by the lender.

4. Obtain Closure Certificate:
   
   After the payment is processed, ensure you receive a loan closure or a no-due certificate from the lender as proof that the loan has been fully repaid.

5. Update Credit Records:
   
   Verify that the closed loan is accurately reflected in your credit report. This can take a few weeks and is important for maintaining a good credit score.
   
   

Pre-Close Your HDFC Bank Xpress Personal Loan Without Any Hassles

Anyone who takes a loan waits for the moment when they can become debt-free. At HDFC Bank, we understand this, which is why we permit loan pre-closure at any time, without any hassles. We also levy nominal loan pre-closure fees. Whether you wish to apply for Xpress Personal Loans from HDFC Bank or close an existing one, you can easily do so through our online channels.

​​​​​​​*Disclaimer: Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Personal Loan at the sole discretion of HDFC Bank Limited. Loan disbursal is subject to documentation and verification as per Bank’s requirement. Interest rates are subject to change. Please check with your RM or closest bank branch for current interest rates.