Whether it’s a business loan, personal loan, or credit card-linked loan, the act of borrowing money from lenders is bounded by terms and conditions. Depending on your loan tenor, each borrowed amount is covered with interest charges. Loan repayment is stressful, especially if your installments range from 12-60 months. The extended loan tenor prolongs the agony of borrowing such that you wish you had the money to pay it off.
What to expect from the early closure of a personal loan?
Sometime within the loan period, you get hold of cash and decide to settle the loan in advance. If this happens, here are the things you need to understand:
1. Pre-termination comes with a price
When a borrower wants to break away from the long-term contract, the banks or any other type of lender imposes a fee known as a pre-termination fee. The pre-termination cost is not the total interest charged within the loan term. Also known as early termination fee or pre-payment fee, the pre-termination charges refer to the first settlement penalty for breaking the contract. Most banks come up with an early termination fee of Php500 or 5% of the remaining balance, whichever is higher.
For example, you borrowed Php100,000 for 24 months. You decided to pre-terminate the loan on the 5th month with a remaining balance of Php70,000. That would leave you with a Php3,500 pre-termination fee as an add-on to the Php70,000 remaining balance.
2. Interest charges are computed daily within the billing period
The additional costs to the loan don’t end with the pre-termination fee. Interest charges are calculated, too, from the time you decide to close the account until its next billing cycle. Even if you have the money to pay the debt in full in November, you still need to pay the interests until the following statement in December. According to lenders, this happens because the November statement reflects the amount generated from the previous month. That is why you still need to pay the full remaining balance plus the interest charges from the current to the next billing cycle.
3. You need to wait for the next billing cycle for the loan to be completely closed
As mentioned earlier, your loan won’t be closed as soon as possible. Loan cycles are complex, and lenders have their processes to follow. Once you settled all your dues, including the processing fee, interest, and remaining balance, wait for the bank to come up with a statement that shows your amount payable is Php0.00. Only then can you say that the loan is over, and you will no longer need to pay installments next month.
4. Your PDCs might not be returned anymore
If you issued post-dated checks as a payment guarantee to the loan, you would no longer get hold of them even if you already paid. The PDCs remain in the custody of your lender. Don’t worry about them being used in the future. Paying the full loan amount and closing the account already make the PDCs invalid.
5. Ask for a written acknowledgment of the account settlement
Once you paid off the loan, keep the receipt as proof. You have to call the lender for a written acknowledgment that the loan is settled. Further, ask for confirmation that the account is now closed. The receipt and the verification are enough proof that you don’t have any outstanding obligations with the lender.
How to pre-close a personal loan:
1. Notify your lender
Call or visit the lender and inform them about your intent to break from the contract. Paying off the entire amount without them knowing will invalidate the closure and will not prevent them from imposing the charges until the end of the loan term.
2. Wait for the final computation of amount payable
Upon receipt of your closure request, the lender will calculate everything, including your loan balance, interest charges, processing fee, and pre-payment fees.
3. Pay the total amount due
You need to settle the total amount due on or before the billing cycle’s due date to avoid incurring other fees. Keep your payment receipt as proof of settlement.
4. Call the lender for confirmation of your settlement
With your payment receipt, inform the lender that you’ve already paid the full amount due. Ask for confirmation or transaction reference number that proves the closure. You may need to demand an email or written acknowledgment of your payment for future reference.
Pre-terminating a loan seems to be a complicated process, but if you did your calculations, you'd see that it will save you a lot. Instead of enduring the long payment tenor, you are ending the agony of monthly repayments for up to 60 months. You are also saved from paying the supposed interest charges to be imposed until the end of the term.
Personal loan early termination is a practical choice if the fees and other charges will let you save. There are times when pre-termination leaves you with a higher payable amount compared to continuing the loan until its maturity. This happens because the lender has higher pre-termination fees imposed, which almost equates to the interest charges for the entire term.
Before making any payments, do your Math and weigh the pros and cons of it.
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