Can I cancel a loan after it is approved?

Loan approval is often a moment of financial relief, but sometimes, circumstances change, and you may find yourself wanting to cancel the loan after it's been approved. Understanding the process of cancelling a loan after approval is essential to avoid unnecessary penalties, maintain your credit score, and ensure you manage your finances effectively. While some situations may require loan cancellation, such as securing better financial terms elsewhere or a change in personal financial circumstances, it is essential to understand the possible consequences. Canceling a loan involves specific procedures, considerations, and sometimes financial implications that can impact your credit score. In this guide, we will walk you through the key factors to consider, the steps involved, and the impact on your credit score, ensuring you make an informed decision.

Factors to consider before cancelling a loan

Cancelling a loan after approval is a decision that requires careful consideration. While it may seem like a way to avoid debt, cancelling a loan prematurely can have financial consequences, including fees, penalties, and potentially a negative impact on your credit score. It's important to fully understand the factors that come into play before proceeding with such a decision.

Timing
The timing of your loan cancellation is crucial. If you choose to cancel your loan before the funds are disbursed, the process is generally more straightforward. However, if the loan has already been disbursed into your account, cancelling it becomes more complicated and may involve paying back the disbursed amount with interest. If you’ve already begun making payments, you may also be subject to fees. The sooner you cancel the loan after approval, the less financial impact it will likely have. Be mindful of any initial processing fees or disbursement costs as well, as these can add up over time.

Fees and penalties
Many lenders include cancellation or prepayment penalties in the loan agreement, particularly if the loan is repaid or cancelled before the full term. These fees are charged because the lender loses out on potential interest payments. Some loans also include early repayment clauses that could result in a percentage of the principal amount being charged. These fees vary depending on the type of loan, the lender’s policies, and how much of the loan has been repaid. Before deciding to cancel your loan, carefully check your agreement for any specific cancellation clauses and evaluate the cost of cancelling versus keeping the loan.

Impact on credit score
Cancelling a loan after approval may affect your credit score, depending on how the cancellation is processed. If you cancel the loan before disbursement, there typically won’t be any impact. However, if you’ve already received the funds, your credit report could reflect a closed account, which may affect your credit utilisation ratio. In some cases, cancelling a loan could lead to a temporary dip in your credit score. Additionally, if you fail to pay the remaining balance after cancellation, this could result in late payments and further damage to your credit score. It's important to assess the impact on your credit before making the decision.

Process for cancelling a loan after approval

Review your loan agreement

Begin by thoroughly reading your loan agreement to understand its terms and conditions.

Pay special attention to sections that outline the loan cancellation policy, including any cooling-off periods or associated penalties.

Understanding these details ensures you are fully aware of your rights and obligations before initiating a cancellation.

Contact your lender

Reach out to your lender’s customer service team or your assigned loan officer to discuss cancelling the loan.

Use this opportunity to clarify the loan closure process, associated costs, and the required documentation.

If you are uncertain whether cancellation is the best option, your lender might also discuss alternatives, such as loan restructure, which could address your concerns.

Submit a formal cancellation request

Draft a formal written request clearly stating your intent to cancel the loan.

Ensure you include critical details such as your loan account number, personal contact details, and the reasons for cancellation.

Submit this request through the lender’s recommended channels, which could include email, an online portal, or a physical branch visit.

Retain a copy of your request for your records to track the progress of the cancellation.

Settle any outstanding amount

Confirm with your lender if there are any outstanding amounts, such as initial processing fees or administrative charges, that need to be settled before cancellation.

Promptly clear these dues to ensure the cancellation process is not delayed.

Keep all payment receipts as proof to avoid disputes in the future.

Obtain confirmation of cancellation

Once your request has been processed, request a written confirmation from the lender.

This confirmation should clearly state that the loan has been successfully cancelled and no further obligations remain.

Safeguard this document for future reference, as it serves as proof of loan closure and protects you from potential misunderstandings or errors.

Cancelling a loan after approval may seem complex, but following these steps can make the process seamless. Additionally, consider exploring other financial solutions, such as loan closure or a loan restructure, if cancellation is not your best option.

Fees and charges associated with loan cancellation

Processing fees

Lenders typically charge a non-refundable processing fee when a loan application is submitted.

Even if you decide to cancel the loan after approval, this fee is usually retained by the lender and is not reimbursed.

Administrative charges

Loan cancellation often involves administrative tasks such as reviewing documents and processing the cancellation request.

Lenders may levy a separate administrative charge to cover these operational expenses.

Penalty for early cancellation

If you choose to cancel a loan within the cooling-off period, some lenders may impose an early cancellation penalty.

The penalty amount varies based on the lender's terms and the timing of the cancellation.

Interest on disbursed amount

In cases where a portion of the loan has already been disbursed before cancellation, lenders may charge interest for the period during which the funds were available.

This interest is calculated from the date of disbursement until the date the cancellation is processed.

Documentation fees

Certain lenders may charge a documentation fee for creating and processing the necessary paperwork for loan cancellation.

This charge is usually non-refundable and must be paid as part of the cancellation process.

Taxes and additional fees

Any taxes, such as GST, that were applied to the loan processing or other fees are typically non-refundable.

These taxes are considered a part of the initial transaction and are retained by the lender.

Outstanding dues

Before cancelling a loan, you must ensure that all outstanding dues are cleared.

These could include partial EMIs, pre-disbursement charges, or other fees that were accrued during the loan approval process.

By understanding these fees and charges, borrowers can be better prepared for the financial implications of cancelling a loan after approval. Always review the terms outlined in your loan agreement to avoid unexpected costs.

Impact of loan cancellation on credit score

Hard credit enquiries

When you apply for a loan, the lender conducts a hard enquiry on your credit report, which temporarily reduces your credit score.

If you cancel the loan after approval, the enquiry remains recorded, which could affect your score.

Temporary loan records

If a loan is partially disbursed before cancellation, it may appear as a loan account on your credit report.

This can impact your credit score until the account is updated to reflect the cancellation.

Settlement delays

Failure to promptly settle outstanding dues, such as interest or fees, during the cancellation process can lead to late payment entries on your credit report.

These delays negatively impact your creditworthiness.

Increased application frequency

Frequently applying for loans and then cancelling them may signal financial instability to lenders.

Multiple hard enquiries resulting from repeated applications can reduce your credit score over time.

Credit utilisation ratio

Cancelling an approved loan can lower your total available credit, especially if it was a large loan.

This reduction may positively impact your credit utilisation ratio, as it reflects lower credit usage.

Minimal impact with timely action

If you cancel the loan during the cooling-off period and ensure all associated fees are paid, the impact on your credit score is minimal.

Timely communication with the lender and adhering to their guidelines can help preserve your creditworthiness.

Managing loan cancellations responsibly ensures that your credit score remains stable. If you are concerned about your score, consider alternative solutions such as loan restructuring or renegotiating the loan terms.

Conclusion

Cancelling a loan after approval involves certain fees and potential impacts on your credit score. Understanding the financial and credit-related implications allows you to make informed decisions. Ensure that all outstanding charges are settled promptly, and consider whether alternatives, such as loan restructuring, may better suit your needs. Proactive management and timely communication with your lender can help minimise any negative consequences.