While foreclosing a loan can help save you money as it reduces the total interest you pay, this move isn’t always financially prudent. While the first step is to ensure foreclosure doesn’t strain your finances, keep these tips in mind too.
- Compare your investment returns with the rate of interest on your loan. If by investing the amount required to foreclose your loan in a lucrative option yields more, it is certainly best to invest. Once you earn a lump sum, you can use it to make part-prepayments to reduce your interest.
- Foreclosure attracts penalty interest charged by the lender. If this costs more than the interest you stand to save, a foreclosure isn’t beneficial.
- Certain loans like home loans offer lucrative tax benefits on both interest and principal components. If you foreclose such loans, you’ll have to give up on tax benefits. However, if your tax savings are not significant, go ahead.
- Check the timeline of your repayment. If you are heading towards the end, foreclosure may not save you much as you have serviced the interest payment in the first half of your loan tenor. However, if you’re heading towards retirement, foreclose your loan and enter your golden years stress-free.
- Your credit score improves every time you pay an EMI towards a loan. Consistently paying EMIs boosts your credit score; however, foreclosing it doesn’t boost it too much. So, if you need to build a credit score, reconsider foreclosure.
Keep these pointers in mind and always do a cost-benefit analysis before foreclosing a loan.