Prepayment and foreclosure are two distinct concepts related to loans. While both involve the repayment of a loan, they differ in terms of intention, process, and outcome.
Some borrowers find interest repayment to be financially demanding. If this is the case, they can usually prepay the loan or engage in foreclosure. And to easily navigate this, you must fully understand loan payback prerequisites.
This will also help you to harness any repayment option you choose fully. In such cases, an EMI calculator with prepayment can be used to determine the estimated amount of installments.
This article will help you to understand the differences between prepayment and foreclosure in detail, providing an in-depth understanding of each concept.
What Is Loan Prepayment?
Prepayment is an option for borrowers which enables them to make repayments on their loans early. This may be partially or fully. It aids you in putting any extra funds you find into your debt account. This works greatly to reduce the total amount of the loan you owe. This further reduces the value of the interest that you ought to repay via EMIs.
At this point, you can use the EMI calculator with prepayment for proper calculation of the amount that you are saving. Borrowers who obtain a consistent yearly bonus or other regular incentives from their employer usually opt for this loan type as well.
It’s critical to note that some loans may have prepayment penalties or fees. Some lenders may impose these penalties to compensate for the potential loss of interest income which results from early repayment. Therefore, borrowers should carefully review loan agreements to understand the terms and conditions regarding prepayment.
What Is Loan Foreclosure?
In contrast to loan prepayment, foreclosure is a legal action when the borrower repays his debt in full before the loan’s term approaches expiry. With this, one can greatly reduce his housing loan interest amount significantly. And thanks to this, they can also close out the loan account much earlier than feasible.
Foreclosure is considered a last resort for lenders because it involves significant costs and resources. Lenders typically prefer to work with borrowers to find alternative solutions before moving forward with foreclosure. These alternatives may include loan modification, repayment plans, or refinancing. However, if the borrower is unable to resolve the delinquency, foreclosure becomes the necessary step for the lender to recover their investment.
To engage in loan foreclosure, you must submit a request to the appropriate banking or lending firm. The borrower will then determine the foreclosure value and provide you with an estimation. This estimation will take into account your outstanding debts, the interest that needs to be paid, and the remaining loan term, all of which contribute to your current housing loan interest rate.
At this point, you can repay the total sum and terminate the loan if you are satisfied with the result.
Prepayment Vs Foreclosure Of Loans: What Is The Difference?
The differences between prepayment and foreclosure of loans have also been highlighted in the table below.
|This usually reduces your overall principal value
|This requires total repayment of the loan
|The EMI will reduce with this option
|This comes with no EMI
|Here, the interest rate will decline.
|Here, the interest rate will remain unchanged.
A great number of Indian lenders are currently offering tempting loan plans due to the stronger rivalry in the market. This is valid because lenders hate accumulating much debt. As a result, individuals usually choose to repay their loans quickly via either prepayment or foreclosure and reduce the outstanding balance.
In exchange, borrowers now access lending options with lower EMIs or shorter terms. An EMI calculator with prepayment also eases the calculation process- it helps you immensely when it comes to planning your finances better in the long run.
Make sure you research properly and compare different prepayment options before making the final call. And for ease of decision-making, the above post on the difference between Prepayment and Foreclosure of Loans will aid you immensely.
Interesting Related Article: “What Happens Once Foreclosure Starts?“