A personal loan is one of the easiest and fastest types of loans a borrower can obtain. However, after applying for the personal loan, the situation/circumstances may have changed, necessitating its cancellation. Banks and NBFCs offer customers the option to cancel their personal loans during the cooling-off period.
In this article, we will understand what the cooling-off period is in a personal loan, the steps to cancel a personal loan during this period, and the associated charges.
What is the cooling-off period for personal loan cancellation?
The cooling-off period is a specified time period within which a borrower can review the personal loan terms and conditions and cancel the loan, if required. The time period varies among banks and NBFCs, and usually ranges between 3 to 15 days from the date of loan disbursement. The cooling-off period is also referred to as the free look period.
The cooling-off period is one of the customer protection measures provided by banks. The cooling-off period allows the borrower to reassess their finances after the loan has been disbursed. The customer can have second thoughts about the loan to ensure it was not a hasty financial decision to apply for it. There can be various reasons due to which a customer may want to cancel their personal loan. Some of these reasons include the following.
- The medical procedure/surgery for which the personal loan has been taken has been postponed or is no longer required. The family vacation for which the personal loan was taken is cancelled.
- The borrower has got a favourable personal loan offer from another lender with better terms.
- The borrower finds the personal loan terms and conditions unacceptable.
- The borrower has obtained the required funds from other sources, such as a salary advance from the employer, a bonus, a performance incentive, or variable pay from the employer, etc.
- Deterioration in financial condition, due to factors such as a salary cut, salary delay, job loss, etc., makes the personal loan servicing difficult.
- On second thought, the borrower may feel that they can manage the situation even without the personal loan.
Process of personal loan cancellation
In the above section, we understood the various reasons why a borrower might want to cancel their personal loan. To cancel a personal loan, the borrower must take the following steps:
Check the loan agreement: Go through the personal loan agreement to understand the bank’s cooling-off period and related terms and conditions.
Inform the bank: Contact the bank and submit a formal cancellation request for the personal loan cancellation. It can be done by visiting the bank and submitting a written application, visiting the website/email, calling customer care, etc. The cancellation request must include details such as your personal information, the loan account number, the reason for cancellation, etc.
Make sure the cancellation request is submitted within the cooling-off period. Take an acknowledgement or service request number confirming the bank has received the request.
Return the money: Return the personal loan money to the bank. You can return it through a fund transfer, cheque, cash deposit at the branch, etc. Obtain an acknowledgement from the bank regarding the return of money.
Take cancellation confirmation from the bank: Once the bank receives the personal loan money, it will cancel the personal loan. It may take a couple of working days for the cancellation request to be processed. Once the loan is cancelled, you will get a confirmation from the bank.
Cost of personal loan cancellation
Most banks don’t charge any fees for personal loan cancellation if it is done during the cooling-off period. However, if the cancellation request is submitted after the cooling-off period, charges will apply. Different banks have different fee structures for loan cancellation charges. The processing fee paid while applying or at the time of disbursal is usually non-refundable.
Impact of personal loan cancellation on credit score
The impact on the credit score will depend on at which stage the personal loan is cancelled. Suppose the person has backed out early after submitting the personal loan application. If the bank has not done a credit enquiry, it will not affect the credit score.
If the applicant backs out after the credit inquiry but before disbursal, the impact on the credit score will be minimal. Suppose the bank has disbursed the personal loan, and the borrower decides to cancel it during the cooling-off period. If the borrower returns the money to the bank and the loan is cancelled, there may be minimal impact on the credit score. The score will recover in a short period, provided there are no other adverse events. The bank will inform the credit information companies (CICs) of the suppression of such loans post-cancellation.
Should you cancel a personal loan?
Once you have applied for a personal loan, the circumstances may change. The changed circumstances may require the borrower to cancel the personal loan. In such a case, you may proceed with cancelling the loan. Check the loan agreement to understand the cooling-off period and submit the cancellation request within this timeframe.
Cancelling the loan may result in the loss of the processing fee and some other charges. However, it is still better to cancel the loan if the circumstances have changed or the need for the personal loan is no longer there.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached on LinkedIn.
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