- What is the prepayment facility of different loans in India?
- Know about how much money you can save by doing the Prepayment of different loans
Today, there are different kinds of loans (secured and unsecured) available for your needs. At the same time, an individual needs to repay the loan within a fixed loan tenure, and during this process, he or she can have a massive EMI and Interest Obligations to fulfill. So, how can an individual reduce his or her obligations while repaying different kinds of loans? Well, these can be reduced to an extent by availing the prepayment facility provided by banks, NBFCs and HFCs. So what does this Prepayment facility of different loans allow customers to do?
Well, prepayment of different loans allows borrowers to make part or full payment of their loan amount before the fixed tenure. When borrowers pay only a certain part of the outstanding amount, it is known as the Part prepayment This helps borrowers in reducing both the interest and principal outstanding amount. The EMI amount will also reduce due to the reduced principal outstanding amount. Prepayment could be one of the best methods to ensure maximum savings on a loan.
In this article, we will be telling you about several aspects of the Prepayment facility and how it works in case of different loans in India so that you can understand better by knowing how much money you can save by this facility. We are starting with the Prepayment of Personal Loans. So, keep reading!
Prepayment of Personal Loans
When we talk about the most popular loans in India, personal loan easily tops the list. Lenders provide the required loan amount to customers at affordable interest rates for a maximum tenure of 5 years. Borrowers can repay the loan via EMIs. In case of any loan, individuals want to achieve the maximum savings, and Prepayment is one of the finest options to ensure it. With the prepayment facility, an individual can easily clear off the outstanding principal amount before the fixed tenure.
Lenders ask for prepayment charges that depend on the principal outstanding balance and usually vary from one lender to another. So, let’s say you have got some extra cash at your disposal during your personal loan tenure, you can prepay the loan amount at any point in your tenure. If you don’t want to make the full payment, you can also do it via part-prepayment. We are showing the prepayment charges of some of the top lenders. Please have a look.
|State Bank of India (SBI)||Nil - 3% of the Principal Outstanding Balance + GST|
|HDFC Bank||Nil - 2.50% of the Principal Outstanding Balance + GST|
|YES BANK||Nil - 4% of the Principal Outstanding Balance + GST|
|ICICI Bank||5% of Principal Outstanding Balance + GST|
|Standard Chartered Bank||1% - 5% of the Principal Outstanding Balance + GST|
Now after knowing the prepayment charges, let’s understand how much money you can save by opting for a prepayment facility. We are taking the example of a person who has taken a 5-year personal loan of 8 lakh at 12.99% per annum.
According to these details, the EMI amount will be INR 18,198 and the interest outgo will be INR 2,91,902.
Now, after 2 years, the individual wants to make the part prepayment of INR 3 lakh. At this time, the principal outstanding balance is INR 5,40,184, and interest paid till now stands at INR 1,76, 945.
So, after paying INR 3 lakh, the new principal balance would be INR 2,40,184. For this amount, the new EMI would be INR 8,092. Other important details related to the prepayment are shown in the below table. Have a look.
|Part prepayment Amount Paid after 2 years||INR 3 lakh|
|New Principal Outstanding Amount||INR 2,40,184|
|New EMI amount||INR 8,092|
|Interest Outgo after prepayment||INR 51,113|
|Interest Paid till now + Interest for the remaining Tenure of 3 Years||INR 2,28,058 (1,76,945 + 51,113)|
|Estimated EMI Saving||INR 10,106 (18,198 - 8,092)|
|Estimated Interest Savings||INR 63,844 (2,91,902 - 2,28,058)|
So, you can see by opting for prepayment of INR 3 lakh on his Personal Loan, an individual can save INR 63,844 on the Interest Outgo. The savings will reduce a bit as applicable prepayment charges will be levied.
Prepayment of Home Loans
The primary need of any individual is to have their own home. For this, people take a Home Loan from lenders at affordable interest rates. Home loans are considered to be high-ticket purchases and usually taken for a long period ranging from 20 to a maximum of 30 years. Due to the longer tenure, borrowers can have massive interest obligations to fulfill. But there is a method to reduce these obligations and ensure maximum savings on a Home Loan – Prepayment Facility.
Lenders provide this facility to borrowers so that they can make part or full payment of the outstanding principal amount before the pre-decided tenure. With this, they can reduce both the principal outstanding amount and interest outgo on this amount. Also, you can reduce your tenure by continuing the same EMI amount for the remaining tenure. A person can pay an additional amount at different points in his or her loan tenure above the regular EMI payments. Doing this in parts is known as a Part-prepayment facility.
One of the important points to remember while opting for the Prepayment facility of Home Loan is the charges on it. There are mainly two types of Home Loan Interest Rates – Floating and Fixed. If you have chosen the Floating Rates, lenders don’t charge anything on the prepayment. But if the loan is taken on the Fixed Rate of Interest and the borrower wants to prepay the loan amount via refinancing (taking another loan), charges will range from 2% to 3% of the prepaid amount. Though there are no charges if the customer is using his or her own sources of funds to prepay.
We are showing prepayment charges of some of the top home loan lenders. Please have a look.
|HDFC Limited||On Floating Rate Home Loans:|
For Individuals - Nil
For Non-individuals -
On Fixed Rate Home Loans
|ICICI Bank||Floating Rate Home Loans - Nil|
Fixed Rate Home Loan
|State Bank of India (SBI)||Floating Rate Home Loans - Nil|
|Bank of Baroda||Floating Rate Home Loans - Nil|
|LIC Housing Finance (LIC HFL)||Floating Rate Home Loans - Nil|
Fixed Rate Home Loan -
Now, let’s consider an example to see how much money an individual can save with the Prepayment of Home Loans. Here, we are taking the case of an individual who has taken a 20-year home loan of INR 45 lakh at an interest rate of 7.99% per annum.
According to this loan amount, he must be paying an EMI amount of INR 37,612 and an Interest Outgo of INR 45,26,832.
Now, let’s say after paying the EMIs for 5 years (60 months) without fail, he wants to make a part prepayment of INR 6 lakh to reduce the principal outstanding amount.
At this point, the principal outstanding amount is INR 39,38,099.
So, after making the part-prepayment of INR 6 lakh, the new balance will become INR 33,38,099.
The New EMI amount for this amount will be INR 31,881 and the interest outgo will be INR 24,00543. So, you can see that by making the part-prepayment, the EMI and Interest Outgo can be reduced. Other than this, an applicant can also reduce his or her tenure by paying the same EMI amount for the remaining loan amount. By doing this, the applicant will be able to pay the loan amount way before his or her fixed tenure. And with that, the interest will reduce even more.
Prepayment of Car Loans
People take Car Loans to buy the desired 4-wheelers. Lenders provide the required loan amount at affordable interest rates. So, suppose you take a Car Loan for a fixed tenure. For the first 2 years, you pay your EMIs on time without any trouble. You suddenly receive a huge bonus at work. Now, you want to clear off your outstanding car loan balance. Well, you can do it with the help of the Prepayment Facility.
Simply put, when applicants decide to pay off the car loan before the completion of your tenure, it is known as the prepayment. Usually, Car Loans are given for a period of a maximum of 7 years. So, it is advised to make the prepayment in the initial years of the tenure so that you can ensure maximum savings on the interest outgo as it is generally high in these years. Customers have the freedom to make the prepayment either in part or full according to their convenience.
If you are thinking about the benefits of Prepayment of your Car Loan, let us tell you the biggest of them all. By making the full prepayment, the full ownership of the car will be transferred to you and you will be able to release the Hypothecation. Other than this, you will be able to save on the interest outgo. In the case of Part-prepayment, your EMI amount will also be reduced than before as the outstanding amount will be lesser after prepayment.
You will need to pay a certain fee for the Prepayment facility that changes from one lender to another. We are showing charges of some of the top lenders. Have a look.
|Axis Bank||5% of the Part Payment amount|
|ICICI Bank||5% on principal outstanding or interest outstanding for the remaining period of the loan (whichever is lower)|
|Bank of Baroda||Customized|
Prepayment of Gold Loans
Gold Loan is one of the popular loan options among customers to get the required money against their jewellery and coins for a short tenure. Customers can choose the tenure according to their repayment capacity. All the Gold Loan lenders provide the facility of Prepayment with which a customer can easily repay the gold loan before the pre-decided tenure. Say, you have opted for a 12-month Gold Loan, and now after 6 months, you want to clear off the loan to reduce your interest outgo, you can opt for the Prepayment Facility.
If your finances allow you to repay your Gold Loan before the scheduled closure, do use the prepayment facility to reduce your interest outgo and clear off your balance. Other than this, you can also improve your credit score as when you will clear off your Gold Loan with an early repayment amount, the same will be reflected in the Credit Report and will impact your credit score positively.
The Gold Loan prepayment charges usually tend to vary from one lender to another. We are showing some of the top lenders below. Have a look.
|State Bank of India (SBI)||Customized|
|Kotak Mahindra Bank||2.25% of the prepaid amount if the account is closed 1 month ahead of the tenure.|
Prepayment of Loan Against Property
Loan Against Property is also one of the popular secured loans with which customers can fulfill their various financial needs. They just need to put their property as collateral or security against the loan amount. Lenders provide the Prepayment facility with which borrowers can clear off the loan before the fixed tenure, and by doing this, they can save on their interest outgo over time.
Customers need to pay fixed Prepayment charges that depend on the principal outstanding amount and usually vary from one lender to another. We are showing prepayment charges of some of the top lenders. Do check.
|Axis Bank||3% of the Outstanding Principal Amount + GST|
|Kotak Mahindra Bank||Nil Charges for loans given at Floating Rates|