RBI Guidelines on Foreclosure of Personal Loan

Today’s fast paced and social media centric lifestyles translate to a constant need for funds to keep up with one’s peers. Most of us may have felt the allure of spending on credit, be it for a new cell phone or an international vacation.The ability to push back payments to a future date makes these big ticket expenses more affordable.

More and more people are falling into the trap of taking personal loans for the purpose of funding their way of life. But it’s more than just about fancy gadgets and European holidays. Personal loans also cover financial gaps for things like medical emergencies, higher education, and a shortfall in home loans, among others.

What’s a Personal Loan?

It is essentially a loan which is taken without collateral by individuals from either an NBFC (Non-Banking Financial Company) or a bank. As most people are aware, an unsecured loan in India has a much higher interest rate than one taken against collateral.

As in the case of other types of loans,defaulting on payments will affect your credit score and history. The high-interest rates mean that sometimes it is to your benefit to close the loan as soon as you have the available funds to do so.

Personal loan- Terms and Conditions:

All the conditions to be met before receiving the loan, the rate of interest, the duration, etc. depend entirely from person to person and the respective loan providers. But when it comes to foreclosure of the Personal Loan, the Reserve Bank of India lays down specific guidelines to be followed. It’s good to be aware of these prior to applying for a loan.

Many lenders fix a sort of penalty for those who undertake a pre-closure of their loan. This happens despite the fact that the Reserve Bank of India is against such penalties. Banks are no longer allowed to charge pre-payment penalties or foreclosure charges on personal loans, amongst others.

How Do You Go About The Concept Of Pre-Closure Of Loan?

Awareness of RBI mandates such as those mentioned above ensures that you can bargain with your lender to come to more favourable terms.

The decision to close the loan early also depends on the stage your payments have reached. If it is nearing the end of the loan tenure, it may not make much sense. Most loans tend to start with interest payments first and principal repayment later.

This means that pre-payment at an early stage would save you on some portion of interest payments. But waiting until the end of the loan tenure to close the loan early means you might just be paying back the principal faster. The final amount would be the same whether it is paid immediately or in instalments.

The fact that the Reserve Bank of India has undertaken this measure to discard foreclosure charges or pre-payment penalties on floating rate loans is a great boon for ordinary individuals. Not only can it help you save money in the form of these penalties, but also in the form of eliminating certain interest payments.

Their financial benefits attached for sure, but there are psychological ones as well. Paying your loan off early gives a sense of mental peace and freedom. If it is within your means to do so, you should not have to pay the price for it.

Ultimately,this gives the borrower the freedom to decide how they want to space their borrowings and finances out. There are advantages as well as disadvantages to both. But these sort of positive measures taken by the government or bodies like the RBI gives you, the ultimate consumer, the right to choose what’s right for you.