Why Does Financial Institution Utilise a Foreclosure of Loan?

Why Does Financial Institution Utilise a Foreclosure of Loan

If you are wondering what is the foreclosure of loan and why banks or other institutions use this against loans taken by you for purchasing any property, you are at the right place. Let us learn more about it.

Most of us take loans to accomplish our dreams of purchasing a two-wheeler, housing, car or other consumer products that otherwise seem out of reach due to financial reliance. When obtaining a loan, the borrower determines the span of repayment and the individual’s capability to repay.

The borrower is needed to repay the loan within the pre-determined period according to the duration of the loan. Still, occasionally there is a shift in the income level due to advancements, new jobs, incentives, etc., which improves the capacity of the customer to repay the loan.

The borrower has the opportunity to repay the loan before its due date, and this repayment with a one-time charge, in financial words, is known as foreclosure.

Personal loans are one of the loans considered under the Foreclosure of Loan. They have a specified repayment period and a fixed or variable interest rate; they levy interest rates and calculate and determine EMI. There are three ways in which a borrower can repay the loan-

  • Pay off the loan during the whole maturity period,
  • Paying an extensive portion of the loan before the end of the possession, i.e. partial early repayment, and
  • Paying off the loan entirely before the end of the term, i.e. foreclosure.

Foreclosure of loan

When you take a loan from a bank or any person, the lender sets some conditions, including the loan duration. It is a foreclosure if you determine to pay off the loan amount before meeting the time limit.

When you decide to foreclose, generally, it is because you have surplus money to repay the loan and no longer need to pay EMIs. It enables you to save money because you do not have to pay interest.

What is the difference between pre-payment and foreclosure?

For most financial institutions, pre-payment and Foreclosure of Loan are separate concepts and apply different costs. If you make a partial loan payment before the due date, it is called a pre-payment. However, if you choose to repay the amount owed before the end of the loan duration, it is known as pre-closing or loan foreclosure.

Expenditures for both these facilities vary from bank to bank, so ensure you understand the appropriate fees before opting for either.

Knowing more about personal foreclosure of loan

Imagine a circumstance where an individual gets a large sum of money loan and wants to pay it all off before the refund course lapses. It is known as closing the loan or sometimes even pre-closing the loan.

If people use this alternative to repay a personal loan, it is called a personal Foreclosure of Loan. It will decrease the interest liability, and the loan account will also be closed prematurely.

Classes of personal loan foreclosures

There are two classes of personal loan foreclosures:

Closure of the loan by the bank

The borrower does not always require foreclosure of loan. If the borrower defaults on individual EMI payments for a successive period or has dissuaded from making monthly charges and is no longer financially qualified to pay back the loan, then, in that case, the bank will have to foreclose the loan.

In such a case, the bank will take the required measures to auction the borrower’s collateral to receive the money equivalent to the due amount of the loan. After the bank draws the correspondence payment, it moves to close the account.

Eradicating the loan by the borrower

As a borrower, when you have more available reserves and want to reduce your financial obligation, you can go for loan foreclosure by settling the entire loan amount. Before you take this step, you will also need to evaluate the fees and ensure you understand the terms and conditions of closing your loan account.

You will get asked to deliver some identity records and other information determined by the bank.

Charges on personal loan foreclosure

When you choose the foreclosure of a loan in the case of personal loans, in compliment to paying the proportion of the loan, in most cases, you will have to bear fees levied by the lender. These collections of fees for the loan foreclosure are to reimburse for lost interest due to the borrower’s judgment to pay off the unpaid fees in one payment.

These fees vary depending on the bank or financial institution with which you have this loan account. The fees accumulated usually range from 3% to 7% of the due principal amount of the loan. In proliferation, applicable taxes get included.

Before you opt for a loan foreclosure, assess these fees to decide if settling off your loan in full is advantageous to you or if it adds even more to your financial load.

Why do foreclosures happen in the case of housing loans?

A loan foreclosure occurs when a homeowner fails to repay the mortgage loan used to buy the home.

Foreclosure is not a pleasing experience for a homeowner. No homeowner wants to experience this, and in most circumstances, home loan defaults generally get driven by an unforeseen financial downturn or a transformation in the owner’s affairs. The explanations for why a home could go into foreclosure are limitless, including:

  • Loss of employment, either through termination, layoff, or inability to work due to health grounds
  • Unanticipated medical bills
  • Breakup or divorce
  • Incidental costs associated with home maintenance itself

Calculation of personal loan foreclosure

Each financial institution or bank charges differently for the foreclosure of loan. While most lending institutions permit borrowers to pre-close their loans accounts, there are specific prerequisites, including –

  • The prospect of foreclosure of the loan is given only after repayment of a particular number of EMIs.
  • A pre-payment penalty varies from 1% to 5%, depending on the amount remaining before foreclosure.

Several online foreclosure calculators provide the number of fines that must get paid.

Foreclosure expenses, if levied, are a ratio (of 1% to 5%) of the outstanding loan. Buyers should be mindful that this percentage may deviate from lender to lender.

How to foreclose loans?

Foreclosure is not a complex approach. A borrower must fulfil the following conditions for the foreclosure of a loan:

  • Borrowers need to check with their lender whether foreclosure is feasible, heeded by corresponding information such as the closing penalty and the number of EMIs that will have to get paid to be qualified.
  • After fulfilling all the criteria, the borrowers must apply for a foreclosure loan through the lending institution and deliver the necessary documents.
  • Once the application gets processed, the lender will decide on the next step. It is typically the allotment of a payment ID or other alternative through which claimants can make foreclosure settlements.
  • Once all the amounts get paid, and the loan gets foreclosed, the lending institution must use the NOC or No Objection Certificate as evidence showing the payment of all balances.
  • It also guarantees that the lender will no longer have any legal rights to the documents delivered.
  • A loan freeze also influences the borrower’s CIBIL score, so customers must clear that banks suitably revise their credit information as soon as practicable to avoid disparities later.

Loan foreclosure procedure

Follow this procedure for the Foreclosure of Loan:


First, write a proposal to the financial institution/bank for the foreclosure of the loan. The existing loan account number, a copy of the PAN number, and a copy of the address proof can get affixed to the application.

Method of payment

After accepting the request, the bank estimates the amount owed after considering the interest settled so far and the foreclosure date. The bank will communicate the balance due, which the borrower needs to pay by cheque or online transfer (NEFT/RTGS).

Foreclosure fees

No premature repayment penalties can get levied for the foreclosure of loans with an unstable interest rate. Some fees may apply to fixed-rate loans, and these fees will have to get added when completing the foreclosure settlement.

Receiving documents

After obtaining the overdue payments, the bank will manage the formalities associated with foreclosing. EMI notifications will get blocked instantly. The bank will return original documents such as title deeds and related documents to the buyer within 10-15 working days.

No confirmation of fees

Along with the authentic documents, the customer must obtain a zero-dues certificate from the financial institution that no balance is due. The certificate must contain the property’s address and the customer’s name.

Penalty charges

The sanction for the foreclosure of loan varies from lender to lender. While some banks do not levy a foreclosure fee, others may assess a fee relying on when the foreclosure occurs.

For example, some banks levy a 5% penalty if the borrower repays the loan in the second year and 3% if he pays it off later.

Some banks let borrowers pay off the loan prematurely, only twice after the first year of repayment; other banks do not permit any early repayment.

You also have financial institutions that do not charge pre-payment fees but do so in case of foreclosure.


Foreclosure of loan is a measure the lender takes when the borrower fails to pay the loan. The lender takes over the lawful authority of the mortgaged property and trades the asset (property) to retrieve the loan amount.

During the early phases of foreclosure, the bank or lender vigorously endeavours to settle the debt and return property ownership to the buyer. However, after a considerable amount of time has passed, the lender will often issue a notice to the buyer. They find that settling the loan will be best executed by putting the property back on the market and selling it to a new customer.

A lender who gives the individual or family funds to purchase the home owns the foreclosed property. The borrower owns the house if the borrower doesn’t reimburse the loan. The goal is to sell foreclosures in heaps. If the lender is keen to sell the foreclosed property individually, it will get listed with the related agencies.


What is the foreclosure of loan?

The complete repayment of the loan balance in a single payment before the scheduled period of Equivalent Monthly Installments (EMIs) is known as loan closure.

How to calculate foreclosure of loan?

Premature closing of the loan or full repayment of the remaining loan amount with a single payment is called loan foreclosure. Use the foreclosure calculator by selecting the number of EMIs you have already paid and the month in which you want to foreclose the loan.

What are the options for the foreclosure of loan?

The loan foreclosure option is provided only after repayment of a certain number of EMIs. Early repayment penalty varies from 1% to 5%, depending on the balance before foreclosure.

What are the benefits of foreclosure of loan?

The benefit is the reduction of the total interest liability from the loan by foreclosure. While most lenders charge a penalty, it is still beneficial to opt for foreclosure whenever possible.