In most cases, pre-payment on a car loan comes with a penalty charge. Some banks such as HDFC Bank have a lock in period which is usually around 6 months for a car loan, before which, pre-payment to close the loan is not possible. After the lock in period, one can make a pre-payment to close out his/her car loan, but it will attract a certain amount of pre-payment charges. The sooner you pre-pay your car loan, the higher the penalty charge in most cases. If you choose to pre-pay your loan towards the end of your tenure, the pre-payment charges are generally much lower on the car loan. Banks such as HDFC Bank, ICICI Bank and Axis Bank charge a penalty fee for pre-payment of the car loan. Penalty charges are taken as the bank does not get its anticipated interest from the customer.
In some cases, there are no pre-payment penalties for a car loan. Banks such as State Bank of India and Bank of Baroda do not charge their customers any pre-payment charges on their car loans.
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