FORECLOSURE MONTH
It is the month in which the borrower pays off the entire sum of the loan all at once and ahead of schedule.
FORECLOSURE VS PREPAYMENT
Prepayment of a loan allows the borrower to make partial payments or complete loan repayments of the outstanding balance before the loan's term expires. Thus, it shortens the loan period and monthly EMI.
However, a foreclosure allows the borrower to pay off his entire loan obligation at once before the loan's term is over and the borrower is left with no further liability to the bank.
FORECLOSURE CHARGES
The extra charges that lenders charge borrower(s) for paying off the loan before the term is up are known as a foreclosure charge, sometimes known as a prepayment penalty. Most lenders typically impose a one- to two-year lock-in term during which borrower(s) cannot foreclose on the loan.
Banks and NBFCs are not allowed charge any Foreclosure/Prepayment penalty charges for floating interest rate term loans given to individual borrowers (with or without co-applicants) for purposes other than business.
Therefore, the borrower must confirm that no prepayment penalties have been included by the lender to the computation of the foreclosure amount.
LEGAL RULE
As per RBI circulars DBOD.No.Dir.BC.107/13.03.00/2011-12 dated June 5, 2012, and DBOD.Dir.BC.No.110/13.03.00/2013-14 dated May 7, 2014, banks are not permitted to charge foreclosure charges / pre-payment penalties on home loans / all floating rate term loans sanctioned to individual borrowers. Floating loan products include housing, corporate, vehicle, and personal loans.
CHECKS
Despite the RBI mandate, some banks charge foreclosure charges on personal loans ranging anywhere between 4-5% of the outstanding loan amount. Check if your bank also charges similar fees on foreclosure of loan.
1. If so, then calculate the prepayment charges as against the interest to be paid in the future if the loan continues.
2. If one chooses Foreclosure on a home loan, then one has to give up on the tax benefits under sections 80C and 24b of the Income Tax Act.
3. If possible, foreclose loans at the beginning of the loan tenure as interest liability is highest at the beginning of the loan tenure than prepaying at a later date.
4. Do not opt for a higher EMI as it affects debt to income ratio and in-turn credit score.
