Skip to main content

Loan prepaying comes at a cost

Try prepaying annually as foreclosing your loan comes at a cost

Since banks lose out on their interest income in foreclosure, it leads to an asset-liability mismatch. This is the reason why they charge a prepayment penalty

Home loans

Most private banks and housing finance companies levy a foreclosure charge of two per cent or more on the outstanding loan amount. In case of most public sector banks, the penalty is slightly lower at one per cent of the principal amount prepaid. But even at one per cent, you need to pay an additional `10,000 if your outstanding amount is `10 lakh.

Banks claim that if you prepay the loan from your 'own' funds, there would be no penalty. 'Own' sources could include a rise in salary, disposal of property, bonus, etc. But proving it is quite difficult. Banks, normally, argue on two fronts. First, they are losing out on interest income. Second, customers avail of a cheaper rate loan from another bank to prepay.

"We know when the customer approaches another lending agency, as the latter checks his/her credentials with us, besides handing over the cheque directly to the bank. Those customers are charged a penalty," says R C Lodha, deputy general manager, Union Bank of India.

In any case, even when banks take over loans, any penalty component has to be borne by the customer.

Saving on charges: Making partial prepayments is one way to save. Most banks have zero charge for partial prepayments, albeit with conditions that vary from one bank to another. For instance, HDFC allows prepayment of up to 25 per cent of the outstanding for free. Some stipulate that loans cannot be foreclosed within a year of making partial payments.

Car loans

In case of prepayment of car loans too, public sector banks score over others. At one per cent, prepayment charges by most public sector banks are the lowest, as against three-four per cent in private sector banks and car finance companies. To discourage prepayments, some private banks even prescribe a time-limit, until which they do not accept prepayments on the car loan.

Saving on charges: Although a penalty charge is non-negotiable, it can be lowered if you are closer to completing your term and want to foreclose the loan.

When a customer with a good track record wants to foreclose his loan, we approach the bank and ask for a special waiver. The reduction in penalty, in such cases, depends on the bank's discretion.

Personal loans

Banks generally offer personal loans for 24-36 months. Foreclosure charges range from two-four per cent. Again, these loans will be subject to conditions of particular periods, after which you can repay the loan. For instance, some private sector banks allow prepayment after 12 months of availing the loan. Depending on your credit limit, you could also get a personal loan against your credit card. This is for a minimum period of one year and a maximum of four years. The prepayment charges are again in the same range.

Saving on charges: The bank may reduce or even waive the penalty totally, in case it is convinced that the customer wants to get rid of the liability and is paying-off from his own sources.

 

Popular posts from this blog

ICICI Prudential Dynamic Plan Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   ICICI Prudential Dynamic Plan             Invest Online This fund does remarkably well during falling markets, but fails to show the same prowess during a rising market. The fund sticks to its mandate to adapt to the dynamic nature of the market by shuttling between debt and equity. It takes aggressive asset calls in equity when the market surges by investing in quality mid-cap stocks. At the same time, it adopts a defensive strategy by investing in debt and cash when markets get overvalued, making it a good long-term choice.     For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call     Leave a missed Call on 94 8300 8300   Leave your comment with mail ID and we will ...

Feeder funds are the cheapest way to invest in gold

Buy Gold Mutual Funds Invest Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Call 0 94 8300 8300 (India)   There are four ways to put your money in gold — buying physical gold/jewellery , putting money in gold exchange-traded funds ( ETFs ), investing in a gold savings fund and going for the National Spot Exchange's e-gold. Now, some gold ETFs and e-gold even allow taking physical delivery of gold at the end of investment tenure. That might sound good if you wish to possess physical gold. But, given the firm price of gold today (almost ~31,000 per 10g), it is important that gold is bought through acost-effective avenue. Reason: Investing comes at a price. Add to that, India's gold buying is expected to decline in 2012 and 2013, according to the latest World Gold Council ( WGC )report. WGC Director Vipin Sharma feels gold imports may drop to 800 tonnes from 967 tonnes last year. And the mix between the jeweller...

Lump Sum or SIP?

Invest Mutual Fund Online     You have a lump sum in hand and you wish to invest in equity funds. However, you have heard a lot of talk about investing in equity funds through Systematic Investment Plans (SIPs) because they help average costs, ensure you do not ill-time the market, and help you invest in small sums, besides giving you many other advantages. So, should you invest the money you have in hand in one go, or let it remain in your bank account and then do an SIP? There is no harm in investing a lump sum amount. For all you know, compounding, over the long term, could work better with lump sum. However, make sure you fulfill all of these three criteria if you want to invest in one go. Else, SIP is the way to go. #1: You invest for the long term According to past data, ideally, if you have a time frame of 12 years or more, you can consider lump sum investing (provided you satisfy the other two conditions that follow). So, what is the sanctity behind 12 years? Is it because only...

Mutual Fund Review: Reliance Regular Savings Balanced

Reliance Regular Savings Balanced fund has shown great resilience during market crash After a shaky start, this fund has established itself as a strong contender in this space. In the past three years it has ridden the market well by not only delivering during the market run-ups but also displaying resilience during the crash. In 2008, it witnessed the second lowest fall among its category and last year it was amongst the top three performers with a return of 76 per cent (category average: 61%).   The poor underperformance in 2006 can well be credited to the low equity allocation of the fund, which stood at just over 10 per cent for only four months that year. Though the fund has the leeway to go up to 75 per cent in equity, it has never touched that limit. In fact, it has exceeded 70 per cent in just five months in its entire history. During the crash of 2008, the fund managers had no problem going right down to 54 per cent (equity exposure). Fund managers Omprakash Kukian and A...

Tax Returns: Myths and facts of filing your Tax Returns

THE fiscal year has ended and many choose to make tax-filling. Despite this being a regular, annual ritual, several tax payers have some misconceptions, some of which are listed below: Misconception No. 1 Filing tax returns is a complex and cumbersome process. I need a Chartered Accountant to help me file my tax returns. Contrary to popular belief, preparing and filing tax returns is actually quite simple. If you have a digital signature you can accomplish the entire process sitting at home on your computer thanks to the e-filing facility on www.incometaxindiaefiling.gov.in. Alternatively, you can submit the returns online, print a one-page receipt, sign it and drop it off at the income tax office within fifteen days of submitting the returns. No documents are required to be submitted with the receipt. However, if you want help, there are several third party service providers who offer tax preparation and filing services for a fee as low as Rs 200. Misconception No. 2 The interest I p...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now