Is prepayment beneficial in all cases?
Home, car and education loans prove to be very helpful in meeting financial goals. A large part of the EMIs has to be paid as interest outgo. To ease this burden, most people try to repay the debt prematurely. This is a good option for your financial health.
Rohit wants to pay his entire car loan with the amount received from the maturity of his insurance policy. When he reached the bank, the story turned out to be different. Rohit’s loan was for five years and as he is ending it in just one year, the bank officials are asking him for a three per cent foreclosure charge. But while applying for the loan, he was not told about this. Should Rohit pay his loan prematurely, what are the benefits of loan prepayment, let’s find out.
Home, car and education loans prove to be very helpful in meeting financial goals. Usually, these loans are for a longer period ranging from three to 20 years. A large part of the EMIs has to be paid as interest outgo. To ease this burden, most people try to repay the debt prematurely. This is a good option for your financial health. This leads to substantial savings in the form of interests. If you are thinking of paying back a loan partially or fully in advance, then, first of all, you should decide which loan will you payback in advance. And how much charges would the banks levy.
Suresh Kumar Bansal, a former banker, says the RBI has prohibited charging fees on partial or full pre payment of home loans. No charges would be levied on floating rates. However, fixed rate home loans can attract some charges under different circumstances. Public sector banks are lenient while private banks are arbitrary. Actually, private sector banks include some conditions while sanctioning of the loan. On this basis, arbitrary fees are also levied. If you are paying the loan prematurely, then make sure that the EMI of other ongoing loans is also paid on time.
How can you make assessment?
Personal finance expert Jitendra Solanki says that if you have many types of loans running against your name, then, first personal and car loans should be repaid because there is no benefit of income tax on the payment of such loans. Generally, such loans are expensive compared to home and education loans. You also get good amount of tax exemption against home and education loans. Therefore, it is necessary to assess these loans on the tax front before you decide to repay prematurely.
Solanki says that if you are prematurely paying any loan partially or fully, then, first of all find out whether the bank or finance company is charging you any fee or not. Financial institutions charge 2 to 6 percent on premature repayment of loans. This fee depends on the amount of outstanding loan and the tenure period. Usually, banks charge a fee for repaying any loan six months in advance. It also depends on the rules of different banks. Different banks charge different rates on loan pre payment.
For example, HDFC Bank charges a fee of 6 per cent for prepaying a car loan one year in advance. If you prepay this loan partially or fully after one year after its commencement, then a fee of three percent will be levied. In such a situation, if your loan is 11 months old and you repay it after one month, then, you will get a benefit of three percent on the outstanding amount.