Loan foreclosure is the process of doing full repayment of the remaining loan amount in one single payment instead of paying it back in multiple equated monthly installments (EMIs). Borrowers may look at foreclosing a loan when their repayment capacity increases.
While this may work in borrowers' favor (as it reduces the overall interest cost), some lenders may levy fees on prepaying or foreclosing loans offered on fixed interest rates. Hence, borrowers should factor in several things before going for loan foreclosure, experts opine.
According to Gaurav Aggarwal - director, unsecured loans, Paisabazaar, customers should firstly check the fees before opting for the loan foreclosure.
"In case cost incurred on foreclosing a loan outstrips the savings made on interest cost, customers should avoid the foreclosure," Aggarwal suggests.
Secondly, borrowers considering loan foreclosures should avoid sacrificing their emergency funds and corpuses created for crucial financial goals.
"Doing so might force them to take costlier loans to deal with any unforeseen financial exigencies or materialize crucial financial goals," Aggarwal explains.
Those with existing home loans or car loans, and exposed to equity investments for long term financial goals should also factor in prevalent market conditions before making loan foreclosures.
"Interest rates charged on secured floating rate loans like home loans and car loans, at least for those with excellent credit profiles, are usually lower than returns generated from equity fund investments over the long term. Hence, surplus funds during bearish market conditions would be better utilised in buying more equities than prepaying such low rate secured loans," Aggarwal illustrates.
Similarly, surplus funds during overvalued market conditions should be used to make loan prepayments than making equity investments as buying equities during overvalued market conditions usually reap lower returns.
However, when it comes to unsecured loans like personal loans, loans against credit cards, etc, prepaying them always makes more sense than investing in equities under all market conditions as such loans come with very high-interest rates. Borrowers having multiple loans should even prioritize foreclosure of those costing the highest interest rates, according to Aggarwal.
Disclaimer: The views and investment tips expressed by investment experts on CNBCTV18.com are their own and not that of the website or its management. CNBCTV18.com advises users to check with certified experts before taking any investment decisions.
(Edited by : Jomy)
First Published: IST