Advantages and disadvantages of foreclosing a personal loan

Personal loans are unsecured loans which mean borrowers do not need to pledge any form of collateral or security while availing funds through instant personal loans. This is the reason why lenders charged a high rate of interest while lending them. This is because lenders want to minimize the risk of default on the part of the borrower. However, if you have additional funds lying with you and you are looking to close your loan, you can easily do it because most of the lenders give this facility to the borrowers to get off with loan burden easily. Foreclosing or closing a Instant personal loan means paying off the loan amount in full before the completion of the loan tenure. Foreclosing seems to be a good idea right? Read on to find out its advantages and disadvantages.

Advantages of foreclosing a personal loan-

1. Get rid of high-interest debt early

The most important benefit of foreclosing the loan is that you get rid of paying the high-interest debt early. Hence, repaying them at the earliest is always advised.

2. Saving on the interest outgo

 As you pay off the loan early by cutting the repayment tenure short, you are more likely to save more on the outstanding balance of the loan. This becomes a saving which you can invest in other avenues like fixed deposit, PPF etc which offers attractive returns.

3. Protects your credit score

Since personal loans are an unsecured loan, if you miss paying any of your repayments, you will hit your credit score. When you foreclose your loan, you eliminate the risk of default and thereby protecting your credit score from getting hampered. If you have applied for too many unsecured loans in your name, then foreclosing them with a personal loan is a good choice.

Disadvantages of foreclosing a personal loan-

1. Drain your entire savings

When you plan to foreclose your loan earlier than what you have planned, you put a hole in your pocket towards paying your loan early. This might cause a strain on your finances and it may affect your long-term goals.

2. Paying penalty or foreclosure charges

You can avail a foreclosure facility on personal loans, but most of the lenders will charge you hefty penal charges for availing this facility.

3. Hampering of the credit score

As mentioned above, foreclosing your loan would protect your credit score from getting hampered. But there is another side of the story, your credit score is determined on the basis of various factors such as credit mix and credit history. If you have only one personal loan in your name and you pay it off early, your credit mix would definitely get affected. On the other hand, if you pay off the loan early that doesn't mean that you will build a good credit score. Both of these factors might affect your credit score.

Bottom Line-

So, foreclosing your personal loan has some advantages and disadvantages both. Before applying for a loan online, you need to get well versed through these aspects of foreclosure before opting for it. This will help you make an informed decision.