Loan prepayment & foreclosure: The fast track to debt freedom

What is prepayment?

Prepayment is the process of repaying more than your scheduled EMI amount. It helps you bring down your loan principal and interest rates early and can also shorten your loan tenure. Prepayment is a great way to clear your debts faster and save more eventually.

For example, let us assume that your present EMI amount is ₹15,000.

For a month, you pay ₹30,000. In this case, the extra ₹15,000 repaid along with your usual EMI amount is called a prepayment.

What is foreclosure?

If you make a lump-sum payment towards your loan to repay the entire outstanding amount, it is called a foreclosure. This ends your loan before its originally scheduled term. However, some lenders may charge a small penalty fee for a loan foreclosure.

Say you owe ₹10 lakh with seven years left. If you pay it off now, that is foreclosure. It frees you from having to pay future EMIs and cuts down your interest costs quite drastically.

Are there any downsides?

Some financial institutions may charge you a prepayment or foreclosure fee, as a percentage of your loan amount. This is especially true for loans that come with fixed interest rates. These fees can sometimes reduce your savings, so it is recommended that you check your loan agreement to avoid any surprises in the long run.

Also, if your extra money earns more in investments, such as through mutual funds with higher returns, it might be smarter not to prepay and continue to stay invested.

Conclusion

If your loan has a high interest rate, prepayment or foreclosure almost always helps. Prepayment and foreclosure are useful tools that can significantly lighten your loan burdens in the long run.

Disclaimer: This article is for information purposes only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.