How to Cancel a Personal Loan After Disbursement: A Step-by-Step Guide

Taking a personal loan can often be a quick and convenient solution to cover financial needs, whether it's for medical emergencies, education, or home renovations.

However, situations might arise where you no longer require the loan or wish to cancel it after the amount has been disbursed.

Understanding the loan cancellation process in India is crucial if you find yourself in such a scenario.

This blog will guide you through the steps on how to cancel a loan application, as well as considerations and precautions to take when cancelling a personal loan post-disbursement.

Can a Personal Loan Be Cancelled After Disbursement?

Yes, it is possible to cancel a personal loanafter disbursement, but it comes with specific terms and conditions set by lenders.

Most lenders allow cancellation within a limited period after disbursement, often referred to as the "look-back" or "cooling-off" period.

Beyond this timeframe, cancelling the loan may not be an option, and you may have to follow alternate repayment methods to settle the borrowed amount.

The Loan Cancellation Process

Acting promptly and following the proper procedure to cancel a personal loan is essential. Below is a step-by-step guide:

Step 1: Review the Terms and Conditions

The first step is to carefully read the terms and conditions of your loan agreement. The document often includes details about the loan cancellation process, eligibility for cancellation, associated charges, and the period during which cancellation is allowed.

Step 2: Contact the Lender Immediately

Contact your lender's customer service team or visit their nearest branch to notify them about your intent to cancel the loan. Be prepared to explain your reason for cancellation clearly, whether due to a change in financial circumstances, availability of alternative funds, or other personal reasons.

Step 3: Submit a Loan Cancellation Letter

One key requirement in the loan cancellation process is to provide a written request to the lender. That is done through a loan cancellation letter. The letter should include your loan account details, disbursement amount, the reason for cancellation, and a request for refunding any charges, if applicable.

Step 4: Repay the Loan Amount

If the disbursed amount has already been credited to your account, you must return the entire loan amount, including any processing fees or charges that may have been deducted. Lenders typically require this payment as a lump sum before they approve the cancellation request.

Step 5: Obtain Confirmation

After fulfilling all requirements, ask the lender for written confirmation of the loan cancellation. This document is crucial proof that the loan has been cancelled, and you are not liable for any future payments.

Charges and Penalties to Consider

While cancelling a personal loan, you should be aware of potential costs involved, such as:

• Processing Fees: These are usually non-refundable, even if the loan is cancelled.
• Administrative Charges: Some lenders may impose additional administrative fees to handle the cancellation request.
• Interest Charges: If the loan amount was used briefly, you might be required to pay interest for the duration.
• Prepayment Penalties: Certain lenders charge a prepayment penalty if you return the disbursed amount early.

Review these charges carefully to ensure you are making a financially sound decision.

Impact on Credit Score

Cancelling a personal loan can affect your credit score, depending on the timing and circumstances:

If the Loan is Cancelled Promptly

If you cancel the loan within the cooling-off period and return the full amount, the impact on your credit score may be minimal. The loan might not even appear on your credit report.

If the Loan is Partially Used

If the loan amount has been used and repayment occurs after a delay, it could be reported to credit bureaus. Any missed payments during this period might negatively affect your credit score.

Prepayment or Early Closure

In some cases, prepaying a loan may slightly impact your credit score, but this is often outweighed by the benefit of reducing overall debt.

What if Loan Cancellation is Not Possible?

In cases where the loan cancellation process is not feasible due to lender policies or delays, here are a few alternative options:

• Foreclosure or Prepayment: You can repay the loan in full before the end of the tenure to avoid additional interest. This option often comes with prepayment charges.
• Loan Restructuring: If you cannot cancel the loan but are struggling with repayment, speak to your lender about restructuring the loan terms. That may include extending the tenure or reducing the EMI amount
• Part-Payment: If allowed, making a significant part-payment can reduce the outstanding principal, reducing the overall interest burden.

Precautions to Take Before Applying for a Loan

To avoid the hassle of cancelling a personal loan, consider these precautions:

1. Assess Your Financial Needs: Borrow only the amount you genuinely need to avoid taking unnecessary loans.
2. Read the Fine Print: Always review the terms and conditions, especially clauses related to loan cancellation, prepayment, and penalties.
3. Evaluate Alternatives: Before applying for a loan, explore options such as borrowing from family, using savings, or opting for less expensive credit sources.
4. Plan for Contingencies: Ensure you have a repayment plan, even if unforeseen circumstances arise.

Conclusion

Cancelling a personal loan after disbursement in India is possible. However, it requires quick action and adherence to the lender's terms and conditions. You can successfully manage the situation by understanding the loan cancellation process and preparing a proper loan cancellation letter.

However, to avoid such scenarios, it is advisable to evaluate your financial needs thoroughly before applying for a loan. If cancellation isn't possible, explore alternatives like foreclosure, restructuring, or part-payment to ease the financial burden. Always stay informed and proactive in managing your financial commitments.