The common man today has increased his/her spending potential. With the rise of digital marketing, people now can buy whatever they want instantly. The same can be applied for loans. When you have a specific need, you can fulfill that wish by taking a loan. There is a loan for every basic need right from a house, education, car, business and any other personal needs.
To fulfill these needs, we end up taking a loan. For instance if we talk about a vehicle, then taking a used car loan will help you fulfill your dream of owning a car. Until the tenure ends, you will have to pay monthly EMI’s. During the course of this tenure, sometimes the borrower happens to have more cash with him which can be used to repay towards the used car loan. In this case, there are two things which can be done; One is of pre/part payment and the second option is of loan foreclosure. Below we will explain the difference between prepaying and foreclosing the loan;
What is Pre/Part payment of car loan?
When you talk about part payment, it means you pay an amount which is more than your monthly EMI amount. For eg: If your monthly EMI amount is 20,000 and you want to pay 50,000 that can be called as prepayment of the loan. Before you could prepay, you must get the Bank’s approval on this.
What is Foreclosure of car loan?
When you talk about foreclosure, it means you pay the entire loan EMI amount that is pending. For e.g.: If you have 2,00,000 loan amount pending on your car and you want to close your loan immediately by repaying the whole 2,00,000 then that can be called as foreclosure of the loan. Before you could foreclosure, you must get the Bank’s approval on this.
Benefits of Prepaying and Foreclosing car loan:
The main benefit of prepaying or foreclosing a used car loan is that you can now use the monthly EMI amount for other uses like savings and investment schemes.
Another benefit is related to the interest money that you can save since you prepaid or foreclosed the loan. This can help you save a lot of money.
Should you prepay or foreclose the used car loan?
Just because you have extra money which can be paid towards loan repayment, you must not take that option instantly. Before taking this decision, you must calculate two things;
The amount of interest you will save when you prepay or foreclose the loan
The prepayment/foreclosure penalty charges
In case your savings are more than the penalty charges, then you can opt for going ahead with the prepayment and foreclosure. If the charges would be more than the savings, then you might have to reconsider your choice.