[HTLad]

Hi @sen2693,
Taking a car loan is an agreement between the bank and a person, which comes with T&C’s and I realise that the dealer verbally promised you a deal that you found out is non existent. In usual practice when you sign a document you must read all the clauses some out of which are negotiable. ESP the % ones, these are little monkeys which as humans we tend to miss to read that cause the actual mischief.
I remember reading and going through a team bhp article regarding the same hence was better prepared when we got the document in hand.
Our dealer arranged an agent after we told him we would prefer a nationalised bank for the loan. Attaching the clause from “Key Fact Document” that forms a part of my auto loan I took from SBI dated 12 August 2021 that states the condition for foreclosure and prepayment. This is a standard practice!
The RBI had barred commercial banks for charging this fees from individual borrowers with mortgage loans (& floating rate of interest) but banks are allowed to charge same on non secured loans like auto loans, personal loans etc.

[Samrat]

Originally Posted by sen2693

I recently got a car loan from a nationalized bank. The rate of interest felt marginally better than other bank and also the showroom person helped through it, so went with that. It was said that pre-closure and part-payment charges were null so I was happy with that, since I was in plans to not close it sometime in future.

However, now when I queried the bank recently to make some part payment, I was informed that making part payments or pre-closure will not reduce the TOTAL INTEREST to be paid to the bank, only the number of installments would be less. This was a real bummer as I do not have any incentive to foreclose the loan now.

Now, I do not know much about the loan industry so checking it here - Is this a standard practice or I just got a bad deal? As far as personal loans are concerned, I know for sure that foreclosing it saves interest paid, so assumed car loan would be same as that. Have anyone else experienced this before?

As of now, you cannot foreclose a loan for car. I have verified this in April with ICICI, SBI and PNB. So even if you pay any amount early, your total outflow will remain the same.
Previously SBI allowed to foreclose loan and your interest outgo would be reduced. But currently the process is that they calculate the total interest to be paid and divide it into emis.
So if you take a loan of 8 lakhs and have to pay an interest of 4 lakhs in 5 years, they calculate as 12 lakhs in 5 years giving you interest payment of 20k per month. After 3 years, when you have already paid 20k*36 or 7.2 lakhs, you decide to pay 2lakhs more, they will see that you are paying 9.2 lakhs and will have to pay 2.8lakhs more. As simple as that. No concept of reducing principal or anything currently across banks.

[Aviator_guy]

Originally Posted by Samrat

As of now, you cannot foreclose a loan for car. I have verified this in April with ICICI, SBI and PNB. So even if you pay any amount early, your total outflow will remain the same.
Previously SBI allowed to foreclose loan and your interest outgo would be reduced. But currently the process is that they calculate the total interest to be paid and divide it into emis.
So if you take a loan of 8 lakhs and have to pay an interest of 4 lakhs in 5 years, they calculate as 12 lakhs in 5 years giving you interest payment of 20k per month. After 3 years, when you have already paid 20k*36 or 7.2 lakhs, you decide to pay 2lakhs more, they will see that you are paying 9.2 lakhs and will have to pay 2.8lakhs more. As simple as that. No concept of reducing principal or anything currently across banks.

This sounds strange and totally beats me. Are you sure about the illustration you shared about paying 2.8lacs interest over and above principle outstanding at the time of foreclosure?

[girishv]

Originally Posted by Samrat

As of now, you cannot foreclose a loan for car. I have verified this in April with ICICI, SBI and PNB. So even if you pay any amount early, your total outflow will remain the same.
Previously SBI allowed to foreclose loan and your interest outgo would be reduced. But currently the process is that they calculate the total interest to be paid and divide it into emis.
So if you take a loan of 8 lakhs and have to pay an interest of 4 lakhs in 5 years, they calculate as 12 lakhs in 5 years giving you interest payment of 20k per month. After 3 years, when you have already paid 20k*36 or 7.2 lakhs, you decide to pay 2lakhs more, they will see that you are paying 9.2 lakhs and will have to pay 2.8lakhs more. As simple as that. No concept of reducing principal or anything currently across banks.

I had a car loan from Punjab Sindh bank. Had no problem in pre closure. In fact instead of a lumpsum, I used to pay little extra every month and close to the end paid a lakh + to complete.

What I found is, instead of changing the EMI, the tenure comes down, so at the end of the day its saving of interest.

In my case, if I had not closed in a lumpsum at the end, I would have saved close to 12 months of EMI which translate to approx 3 lakh less payment and it would have been only interest part.
On top of that the bank officials are the most friendliest I have ever interacted.

ICICI always makes it very difficult to foreclose. Instead of directly transferring final amount, I need to visit them twice to handover check and make sure it's deposited. On top of that, I had to pay pre closure charges at more than 5+ % while paying exorbitant rate of 16% for 2 wheeler purchase.

[dr_TJ]

Originally Posted by girishv

ICICI always makes it very difficult to foreclose. Instead of directly transferring final amount, I need to visit them twice to handover check and make sure it's deposited. On top of that, I had to pay pre closure charges at more than 5+ % while paying exorbitant rate of 16% for 2 wheeler purchase.

My ICICI Bank Car Loan pre-closure charges is at 5.9% and also the addition of interests on each day post the EMI due date

I do plan to get my loan pre-closed and get done with ICICI. Next time I will be more careful on getting a car loan for my new car. Atleast one with a decent pre-closure and part-payment policy

[padmrajravi]

Originally Posted by Samrat

So if you take a loan of 8 lakhs and have to pay an interest of 4 lakhs in 5 years, they calculate as 12 lakhs in 5 years giving you interest payment of 20k per month. After 3 years, when you have already paid 20k*36 or 7.2 lakhs, you decide to pay 2lakhs more, they will see that you are paying 9.2 lakhs and will have to pay 2.8lakhs more. As simple as that. No concept of reducing principal or anything currently across banks.

I don't think this is the case with SBI. I foreclosed my 7 year car loan this month at 3 year and 4 months. Every time I paid more than my EMI, I have found the interest from next month onwards reducing immediately. If you want to reduce the EMI by considering this additional payment, you need to specifically request them. As far as I know, SBI charges foreclosure penalty only if you close it with in 2 years.

[Aviator_guy]

Originally Posted by padmrajravi

I don't think this is the case with SBI. I foreclosed my 7 year car loan this month at 3 year and 4 months. Everytime I paid more than my EMI, I have found the interest from next month onwards reducing immediately. If you want to reduce the EMI by consider this additional payment, you need to specifically request them. As far as I know, SBI charges foreclosure penalty only if you close it with in 2 years.

This makes more sense. This is mentioned on the SBI website for car loan "Interest calculated on Daily Reducing Balance". I request OP to double check his source of information.

[Samrat]

Originally Posted by girishv

I had a car loan from Punjab Sindh bank. Had no problem in pre closure. In fact instead of a lumpsum, I used to pay little extra every month and close to the end paid a lakh + to complete.

What I found is, instead of changing the EMI, the tenure comes down, so at the end of the day its saving of interest.

In my case, if I had not closed in a lumpsum at the end, I would have saved close to 12 months of EMI which translate to approx 3 lakh less payment and it would have been only interest part.
On top of that the bank officials are the most friendliest I have ever interacted.

ICICI always makes it very difficult to foreclose. Instead of directly transferring final amount, I need to visit them twice to handover check and make sure it's deposited. On top of that, I had to pay pre closure charges at more than 5+ % while paying exorbitant rate of 16% for 2 wheeler purchase.

Originally Posted by padmrajravi

I don't think this is the case with SBI. I foreclosed my 7 year car loan this month at 3 year and 4 months. Everytime I paid more than my EMI, I have found the interest from next month onwards reducing immediately. If you want to reduce the EMI by consider this additional payment, you need to specifically request them. As far as I know, SBI charges foreclosure penalty only if you close it with in 2 years.

You are absolutely correct. The one that I am talking about has been the case since last year. Previously my father had taken a loan from SBI in 2013 and we closed it almost 3 years ahead of time. It was perfectly possible. In fact only Public Sector Banks gave this option to pre-pay and foreclose any loan (car, house, education, personal) without any penalty. I have repaid my Education Loan of 5 years in 1.5 years as it was from Central Bank. However, things have changed from last year. This was the only criteria which made me go to PSBs. But seeing that it was the same everywhere that no foreclosure is allowed, so we ditched the heavy paperwork and rather went to a Private Bank. I confirmed this with PNB, SBI, UCO Bank and then with ICICI, Axis and HDFC before advising my father to take his loan this time.

Originally Posted by Aviator_guy

This sounds strange and totally beats me. Are you sure about the illustration you shared about paying 2.8lacs interest over and above principle outstanding at the time of foreclosure?

The thing is there is practically no pre-closure facility now.
So if you take a loan of 8 lakhs and over 5 years you need to pay 12 lakhs, then irrespective of how fast you want to pay, you will have to pay the full amount of 12 lakhs. This is done so that people do not have any incentive of early payment. This has come into effect since 2020 sometime. Prior to that pre-closure was allowed on a daily reducing basis interest facility.

[Anees_Offl]

Originally Posted by Samrat

The thing is there is practically no pre-closure facility now.
So if you take a loan of 8 lakhs and over 5 years you need to pay 12 lakhs, then irrespective of how fast you want to pay, you will have to pay the full amount of 12 lakhs. This is done so that people do not have any incentive of early payment. This has come into effect since 2020 sometime. Prior to that pre-closure was allowed on a daily reducing basis interest facility.

Hi Samrat,

Don't think what you are saying is true. After a particular number of months(depends bank to bank), pre-closure is certainly allowed. But yes, you need to to pay a small amount of interest charge or pre-closure charges along with the principal amount. This is the only criteria.

Pls check the following links for your reference.

https://www.bankbazaar.com/car-loan/...procedure.html


https://www.sbi.co.in/documents/1601...=1586332263497


https://www.hdfcbank.com/personal/re...oan-prepayment

[fiat_tarun]

My HDFC loan allowed pre-closure after 2.5 years on a 5 year loan. At the 2.5 year point, I calculated to see how much I would save by pre-closing which worked out to just 50k (on a 8L loan) as most of the interest was recovered already ! Decided to invest that money elsewhere which will give much higher returns and will continue the full loan tenure.

[Aviator_guy]

Originally Posted by Anees_Offl

Hi Samrat,

Don't think what you are saying is true. After a particular number of months(depends bank to bank), pre-closure is certainly allowed. But yes, you need to to pay a small amount of interest charge or pre-closure charges along with the principal amount. This is the only criteria.

Pls check the following links for your reference.

https://www.bankbazaar.com/car-loan/...procedure.html


https://www.sbi.co.in/documents/1601...=1586332263497


https://www.hdfcbank.com/personal/re...oan-prepayment

SBI TnC says the penalty is for fixed rate loans if closed or part paid before certain period. Does anyone know if there is option of floating interest rate where these penalties won't be applicable?

[aadya]

I have had 4 car loans so far with following lenders Sundaram Finance, Kotak Mahindra, BoB(two loans). Sundaram Finance did not have a part-payment option but a Fore closure with 8% penalty. Kotak had two part-payment per year(the amount should be minimum two months emi) or foreclosure with a penalty of 5.5%. BoB both the loans were closed within a year of availing the loan, only restriction was foreclosure would be allowed after six months of the disbursement.

Usually when we avail a loan foreclosure is allowed for secured loans and usually not allowed for unsecured loans with higher interest rate. When foreclosure is allowed the charges are nil or very low for floating rate loans and about 5-6 % for fixed rate loans.

When we do Part payment the banks usually offer the option of either reducing the emi amount and keep duration stable or keep the EMI stable and reduce the duration(number of EMIs). Some lenders offer only one option as default. I think this is the case with the OP.

I have decent experience with SBI, HDFC and Bajaj Finserv with 4 other business loans where foreclosure was done in all except one loan. If we have a longstanding relation with the banks they put an extra effort to get approvals from regional heads for preclosure requests.

[Aviator_guy]

Originally Posted by fiat_tarun

My HDFC loan allowed pre-closure after 2.5 years on a 5 year loan. At the 2.5 year point, I calculated to see how much I would save by pre-closing which worked out to just 50k (on a 8L loan) as most of the interest was recovered already ! Decided to invest that money elsewhere which will give much higher returns and will continue the full loan tenure.

One can see from amortization schedule (which shows how the EMI is split in principle and interest component over the loan duration) that we pay more interest in the initial period. So early closure or part payments saves you more interest vs if you keep loan for full duration or do payments towards fag end of the loan. It is true for any loan be it home loan or vehicle loan.

[Anees_Offl]

Originally Posted by Aviator_guy

One can see from amortization schedule (which shows how the EMI is split in principle and interest component over the loan duration) that we pay more interest in the initial period. So early closure or part payments saves you more interest vs if you keep loan for full duration or do payments towards fag end of the loan. It is true for any loan be it home loan or vehicle loan.

Yes, you are right bro. The design of the loans is specified in such a way that huge amount of interest and meagre amount of principal amount is debited during the initial months.

There is also another condition wherein if you take a car loan for 5 years, you cannot pre-close that loan during the first 12-18 months. This is where the banks earn the maximum. Same is the condition for home loans too. Initial 5 years you would not be able to close.

For home loans, as the tenure is high you will not be able to pre-close it within the initial 5 years. This depends bank to bank & with the tenure of the loan.

[padmrajravi]

Originally Posted by Samrat

However, things have changed from last year. This was the only criteria which made me go to PSBs. But seeing that it was the same everywhere that no foreclosure is allowed, so we ditched the heavy paperwork and rather went to a Private Bank. I confirmed this with PNB, SBI, UCO Bank and then with ICICI, Axis and HDFC before advising my father to take his loan this time.

Your post has distracted me from my next car plans. I had a chat with my SBI branch manager and she maintains there has not been any change in terms and conditions for auto loans. As per her, everything remains the same as my earlier loan which I just closed with them. The interest amount will be calculated based on the daily remaining balance and there is no limit to prepaying. Their only condition is that loan should not be completely closed before two years. The interest rate will be floating and so EMI will change with policy changes that affect MCLR, repo rate, etc. This was the case with my earlier loan too. I had to deal with a small increase in EMI when there was some policy change.

Is there any document or source that you can point me to, which I can show her and clarify ? My primary account is with HDFC and I go through the hassle of dealing with SBI only because of this foreclosure mechanism. If what you are saying is true, I am better off using my pre-approved HDFC loan.