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Old 13th September 2011, 15:19   #1
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Default Good news: Pre-pay car & home loans without penalty

Good news for those wanting to prepay their car loans and home loans. This applies to those who have taken floating rate loans

Source: Economic Times, 7th Septmeber 2011 Edition

Quote:
Now, Pre-pay Your Home & Car Loans Without Penalty

Floating rate borrowers won’t have to pay 3% charges

Pre-payment penalty on floating rate loans, be it for a home or a car, is set to come to an end, bringing relief to lakhs of customers who are forced by banks to pay as high as 3% of the outstanding loan amount when they seek to end indebtedness. “Banks must not recover pre-payment charges in floating rate loans,” the Reserve Bank of India said in a statement on the proceedings of Banking Ombudsman Conference. “Floating rate loans pass on the interest rate risk from banks, which are much better placed to manage it. Banks only substitute interest rate risk with potential credit risk.”
The levy of pre-payment penalty by banks was criticised since it deprives an individual the choice to end the debt burden. Banks have been using it to prevent customers from shifting loyalty and manage asset-liability gaps. A committee headed by former Securities and Exchange Board of India chairman M Damodaran suggested action to improve customer service, including a ban on the practice.
Link to FULL Article

Last edited by GTO : 14th September 2011 at 14:47. Reason: Keeping fair usage policies in mind, it's best to only include an excerpt + link to full article
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Old 13th September 2011, 16:12   #2
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Default Re: Good news: Pre-pay car & home loans without penalty

wondering if is this in effect on immediate basis ?

Also it would have been beneficial if the part payment charges were removed too !

Last edited by dar3dev|l : 13th September 2011 at 16:13.
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Old 13th September 2011, 16:12   #3
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Default Re: Good news: Pre-pay car & home loans without penalty

Thats great! Has it already kicked in or its just a draft proposal by RBI?
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Old 13th September 2011, 16:15   #4
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Default Re: Good news: Pre-pay car & home loans without penalty

This is very good initiative, apart from paying the huge interest rates we were forced to re-think before PRE-closing the loans due to the 5% pre-closure charges. This would surely bring some relief.
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Old 13th September 2011, 16:17   #5
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Default Re: Good news: Pre-pay car & home loans without penalty

HDFC and SBI don't have part payment charges. For SBI you can pay any amount in a financial year.

For HDFC each year you can pay upto 25% of the opening balance of your loan and the minimum part payment should be double of your EMI amount. SBI has no restriction on this. An SBI home loan can be closed after 6 months, for HDFC its 3 year, no information about other banks.
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Old 13th September 2011, 16:26   #6
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Default Re: Good news: Pre-pay car & home loans without penalty

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Originally Posted by asdon View Post
HDFC and SBI don't have part payment charges. For SBI you can pay any amount in a financial year.

For HDFC each year you can pay upto 25% of the opening balance of your loan and the minimum part payment should be double of your EMI amount. SBI has no restriction on this. An SBI home loan can be closed after 6 months, for HDFC its 3 year, no information about other banks.
HDFC does have pre-payment charges. Even for pre-payment after 3 years, there are charges, but you can negotiate it with the bank.

Correct me if i'm wrong, but aren't most (if not all) car loans based on fixed rates? Does this initiative cover fixed rate loans too?
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Old 13th September 2011, 16:49   #7
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Default Re: Good news: Pre-pay car & home loans without penalty

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Originally Posted by ninjatalli View Post
HDFC does have pre-payment charges. Even for pre-payment after 3 years, there are charges, but you can negotiate it with the bank.

Correct me if i'm wrong, but aren't most (if not all) car loans based on fixed rates? Does this initiative cover fixed rate loans too?
well my brother just a month back took an Home loan from HDFC and we insisted on the point of pre-payment charges and on the loan approval letter it is mentioned that there are no part payment charge - condition max payment not more than 25% of opening balance of each year, and no preclosure charge if EMIs paid for 36 months. I don't know about car loans.
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Old 13th September 2011, 17:08   #8
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Default Re: Good news: Pre-pay car & home loans without penalty

^^ For PARTIAL PRE-PAYMENT of Principle Outstanding, there are no charges.

But for PRE-CLOSURE afaik, every bank charges some fee.
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Old 13th September 2011, 17:35   #9
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Default Re: Good news: Pre-pay car & home loans without penalty

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Originally Posted by ch.nathan View Post
^^ For PARTIAL PRE-PAYMENT of Principle Outstanding, there are no charges.

But for PRE-CLOSURE afaik, every bank charges some fee.
For SBI no charges for any payment(part/full)
For HDFC if foreclosed from own fund after 3 years no charges.
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Old 13th September 2011, 18:35   #10
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Default

Before we celebrate, we need to note that this is NOT a decision, nor a mandate by the RBI. It is still at a "should not" kind of stage, which is nothing but just a suggestion. The banking lobby is fairly strong and they will not let go of this income source so easily.

It has to go, but I'll cheer for it only when I see it gone.

Cheers,
R_S
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Old 14th September 2011, 14:46   #11
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Default Re: Good news: Pre-pay car & home loans without penalty

This one's only for floating-rate loans, guys. How many of us actually take a car loan on floating? Whichever cars I have financed, it has always been a fixed rate loan and, I presume, that's the case for a majority of loans disbursed out there.

Nevertheless, a step in the right direction.
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Old 15th September 2011, 20:28   #12
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Default Re: Good news: Pre-pay car & home loans without penalty

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Originally Posted by GTO View Post
This one's only for floating-rate loans, guys. How many of us actually take a car loan on floating? Whichever cars I have financed, it has always been a fixed rate loan and, I presume, that's the case for a majority of loans disbursed out there.

Nevertheless, a step in the right direction.
Well actually in some cases floating rate is lucrative. I have availed of a floating rate loan for one of my most recent cars. SBI offered 8% interest rate for 1st year, around 8.5 or 9% for the next 2 years and the last 2 years at market rate. Before the end of three years, I would close my loan, and in the interim benefiting from a fairly lower EMI and less interest outflow

Last edited by thedreamcatcher : 15th September 2011 at 20:30.
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Old 17th June 2013, 13:44   #13
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Default Re: Good news: Pre-pay car & home loans without penalty

I understand that this has not been implemented yet for car loans. Any idea when will be this effective for Car loans. For home loans this is already in place.

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Old 22nd December 2014, 19:33   #14
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Default Re: Good news: Pre-pay car & home loans without penalty

I plan to pre-close my home loan using my own funds. As per the RBI circular RBI/2011-12/589 (http://www.rbi.org.in/scripts/Notifi...Id=7258&Mode=0) dated 2012, banks shall not levy any foreclosure/prepayment penalty on home loans. Does anyone know if this already in place? Has any bank charged foreclosure charges after 2012?

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Old 22nd December 2014, 20:26   #15
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Default Re: Good news: Pre-pay car & home loans without penalty

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Originally Posted by nirmalts View Post
I plan to pre-close my home loan using my own funds. As per the RBI circular RBI/2011-12/589 (http://www.rbi.org.in/scripts/Notifi...Id=7258&Mode=0) dated 2012, banks shall not levy any foreclosure/prepayment penalty on home loans. Does anyone know if this already in place? Has any bank charged foreclosure charges after 2012?

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No they do not, not anymore.

Only in the first 2 year period (as per bank), you can't pay more than 25% of the total sum.

What does your bank say?
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