Personal loans are the most reliable source of funds for a range of circumstances. Compared to the other loans like car loans or loans on credit cards or home loans, personal loans are not specifically designed to allot for the nature of the expense. Personal loans can be used for any purpose and it is legally permissible. Personal loans can be easily accessed through lending institutions as it is a simple process.
Borrowers can pay the loan outstanding amount with a single instalment or pay throughout the tenure. In the UAE, generally, the personal loans have a lock-in period of minimum one year and after paying the loan for one year the borrower can pay the loan amount. In this article, we discuss the ways you can close your personal loan in the UAE.
Personal loan closures
The following are the ways in which personal loans can be closed.
- Regular Closure
- Foreclosure
- Partial Payment
1. Regular Closure
The regular closure of a loan is a process of paying a loan throughout the loan tenure. The fixed repayment period and the loan repayment schedule are provided by the banks to the borrower. The borrower should pay the loan according to the schedule set by the bank. The rate of interest on the principal amount is calculated by the bank and provided to the borrower. The borrower should pay the EMI throughout the tenure of the loan. There are no additional terms and conditions when the borrower agrees to repay the loan with a regular closure.
The personal loan repayment tenure depends on the choice of the borrower. It ranges from 6 months to 5 years. The repayment duration is different from lender to lender. Lending institutions offer a minimum and the maximum period to repay the loan. Most of the banks have a mandatory period of a minimum of 12 months.
In regular loan closure, the interest rate paid by the borrower is high throughout the period. If a borrower has sufficient funds and wants to reduce the interest payment there are ways available which are discussed in the next following points.
Related: Is it wise to take a personal loan to clear the credit card debt?
2. Foreclosure
The foreclosure of a loan is a way in which the borrower can repay the full loan amount prior to the loan maturity. This method can save a lot of money to the borrower on the EMIs. When you pre-close a loan you save a lot of money without paying the interest. It also depends on the timing of the preclosure of the loan. The best time to pre-close a loan is in the initial period of getting the loan. Some banks do not have a pre-closure penalty whereas few banks charge a pre-closure penalty.
Few lending institutions penalize borrowers for foreclosure of personal loans in the UAE. It is best advised that during the loan approval process find out the prepayment penalty charges. The central bank in the UAE has capped the prepayment penalty up to 1% and this is subject to a maximum of Dh10,000 of the total amount of the remaining balance amount to be paid off.
Depending on the bank’s terms and conditions, the borrower can decide on the pre-closure of the loan. If a borrower forecloses the loan, banks will not get their interest amount which is scheduled to be received in future. This is the reason that banks levy a penalty for preclosure of loan.
If you pre-close the loan there are mainly a couple of advantages that you can make like savings and clearing outstanding debts. Since there is no collateral associated with getting the loan the interest rate is very high. If the borrower makes foreclosure of the loan then gradually savings are done by not paying the interest. The principal and interest amount will be paid off as of that date agreed by the borrower.
3. Partial Payment
If the borrower has an amount of loan and wants to make part payment then the first step is to approach the bank and then discuss the partial payment. Partly paying a loan is acceptable in the UAE.
Partial payment is also known as early repayment. It is a payment that is made partially towards loan repayment as permitted in the terms and conditions of the personal loan agreement. Banks cannot stop borrowers from making prepayment of loans. If a borrower is unable to make foreclosure of the loan then they have the provision of making a partial payment. By making partial payment the principal amount gets reduced. Since the principal amount gets reduced the monthly EMI also gets reduced. It is an easy and effective way to save money.
Some banks charge partial payment charges, if you are making a small amount of partial payment for a huge loan amount along with the partial payment charges then it is not an effective way to make the payment.
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Loan closure effect on AECB Score
When a borrower makes a partial payment or part payment of the personal loan then it will not have any effect on the AECB score. If a loan is paid out entirely then it will have an effect on the credit score. The AECB score improves and borrowers will get good opportunities to get more loans because of the decent credit score.
Process of closing a personal loan
In the UAE, the process of closing a personal loan is very simple. The borrower can repay the outstanding loan amount by following the below steps.
Contact lending institution
Contact your bank which has lent you the personal loan amount. After you get in touch with the bank they provide certain paper formalities for closing the loan. You can also use online banking or get in touch with the customer service executive or use the bank’s official app to quicken the process. Your request for foreclosure of a personal loan in UAE will be received by the bank.
Principal Payment
The bank officials calculate the outstanding amount once your application for foreclosure is received by them. The bank will notify the borrower regarding the total amount due as of that date. This final amount which is payable should be arranged for payment by the borrower. The final amount includes the foreclosure fee which is collected by the bank.
No Objection Certificate
Once the payment has been made by the borrower, the bank gives a clearance letter that the borrower has fully paid the outstanding amount. This certificate is a clearance of debt as there are no dues pending with the bank. The borrower should collect the no dues certificate to ensure the closing formalities of the loan.
Conclusion
There are many things that you should consider before closing the loan. Primarily the factors such as banks terms and conditions, foreclosure fees, lock-in period and your remaining EMIs to repay the loan. Make all the calculations, decide on foreclosure and make the payment. Closing a loan will reduce your debt burden and also improve your credit score in the UAE.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
