All you need to know about Pre-Closure (prepayment) of Loans

There was a time when taking a loan was considered taboo by our parents and grandparents. They were under the impression that taking a loan is risky. But now things have changed people are more comfortable with taking loans and banks also have multiple variants for each product catering to various demographics of customers and their varying requirements.

This topic is has come under debate because some people don’t like to be under debt. They want to complete their loans as soon as possible.

To them a loan is both an emotional and financial stress. On the other hand, there are people who believe that with pre-closure of loans, they could lose out on other benefits of loans such as tax deductions

This article would help those with the above dilemma and would elucidate the benefits of pre-closure of loans, the article also documents the points that consumers need to keep in mind while taking a decision.

What are pre-closure charges?

Pre-closure charges are the charges levied at the time of closure of a loan i.e. fully settling the loan which includes the principle borrowed and the interest at the time of closure.

The banks levy this charge to recuperate some of the interest that they will lose as the customer is paying back the amount before the end of the tenure as the revenue generated from the interest paid is the main source of income for banks.

How much are the pre-closure charges?

There are multiple loan products that banks offer customers, and typically each have varying pre-closure rates. Some banks also don’t allow pre-closure of loans for a certain time.

 Take the case of auto loans which are allowed pre-closure only after six EMIs. At this point the applicant should note that the pre-closure charges are levied on the remainder of the loan.

Personal loan: The personal loans have a large interest rates. This is these are mostly short to medium tenure loans that banks earn quick revenues. The prepayment charges here vary between 3% and 5%

Home loan: According to RBI mandate there are no more prepayment penalties on home loans with floating interest rate. But for fixed interest rates the charges vary from 1% to 5%

Auto loan: The loan taken for purchase of cars or motorcycles. The pre-closure rate varies from 1% to 6%

Loan against properties: These are loans obtained through the pledging of property for various needs. This is a type of secured loan. The pre-closure charges here are between 2% and 5%

Education loan: The loan taken to pursue one’s education be it under graduation or post-graduation in India or abroad. The pre-closure charges here are between 1% to 4% 

Should one go for the pre-closure of loan?

Most of the loans can be repaid in full or partly before the loan closure period, this is known as full prepayment or part prepayment respectively.

The benefits of full pre-payment, is that it eases your burden and the big loan worry is off your back, but there are some lenders who charge penalty rates anywhere between 3-5% in the case of full pre-payment.

One can also go for a part payment on the loan but remember that only payment of the considerable amount of the principal will give you the benefit.

A simple heuristic to keep in mind while deciding on going for pre-closure is that the money that you have allocated for pre-payment should provide you with more returns than any investment or bank interests.