[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?

[abhi_tjet]

Originally Posted by sen2693

I recently got a car loan from a nationalized bank…..Have anyone else experienced this before?

Hi sen , from my experience, I took a car loan from SBI in late December 2013 and foreclosed it in mid 2014. There were no foreclosure/part payment charges.

Interest on Loan amount are generally daily reducing base. If there is no restrictions/separate penalty on part payment(that you can’t do any part payment till 2 years from loan start), I am not sure what’s the problem here.

Once you do a part payment, your principal will reduce. Accordingly, in your next emi, the portion of principal reduction will be a bit more and interest part will be less. So yes, your instalment count will be reduced and you will be able to close loan that quickly.

[JoshMachine]

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.

Pre-closure/Part payment reduces the principal amount, not the interest component. What this means, your overall outgo will definitely reduce since the interest will be now on the reduced principal amount.
So, you do have incentive to foreclose the loan in a way.

It might be worth checking the fine print, though, if the nationalized bank levies some penalty if you try to foreclose the loan too soon i.e. you may be levied a penalty if you start pre-payment before a specific date.

[arvind71181]

This is wrong. Part payment is done directly on the principal amount, which reduces the interest. So part/full repayment will reduce the interest, else what is the incentive to fore close?

[Raghu M]

Originally Posted by arvind71181

This is wrong. Part payment is done directly on the principal amount, which reduces the interest. So part/full repayment will reduce the interest, else what is the incentive to fore close?

Exactly my thoughts. We pay some bulk to reduce the principal not the interest. But the way banks show the statements and calculations, it is beyond normal person's comprehension. Interest should not be collected as a bulk in the first few years of loan duration but rather be spread out across installments. Don't know when these things can be properly regulated.

[anandhsub]

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?

Not sure if I understood it right but are you mistaking EMI with interest?

If you do make a part payment it automatically reduces the principal which means the interest accumulated monthly will be lower and hence out of the EMI a higher portion will go towards the principal and the loan will end faster.

Banks usually do not reduce the EMI amount when you make a part payment.

Originally Posted by Raghu M

Exactly my thoughts. We pay some bulk to reduce the principal not the interest. But the way banks show the statements and calculations, it is beyond normal person's comprehension. Interest should not be collected as a bulk in the first few years of loan duration but rather be spread out across installments. Don't know when these things can be properly regulated.

Why should the interest amount paid be spread out across installments when you have a much higher loan outstanding at the start of the loan rather than at the end?

All that the bank does is charge the monthly interest on the loan outstanding and deducts that from the EMI while the remaining EMI goes towards reducing the pricincipal. It is a very simple calculation.

[sahil624]

There is RBI guideline saying that banks cannot charge foreclosure charges on any floating rate term loan sanctioned to individuals for purpose other than business. Attaching the circular.

https://rbidocs.rbi.org.in/rdocs/not...567A26D798.PDF

[SoumenD]

I think they are taking you for a ride just to prevent you from making foreclosure or part payments. I don’t know of any loan where part-payment doesn’t reduce interest. Yes your EMI amount remains same but your interest contribution reduces as per remaining principal. I tracked my SBI car loan closely for exactly this as I kept doing part payments every quarter and eventually closed it in 1.5 years.

[gkveda]

Can you please name the bank who is saying interest is not reduced even if you prepay the principal amount?

In my understanding, if you pay principal amount, the interest amount for that principal reduces as per RBI Guidelines. All national banks must follow RBI Guidelines.

Also, while taking the loan, you would have signed several papers. The clause mentioned by you must be printed if they are following it now. Else, you have every right to complain about this to RBI. Please check and share the papers here to check if the clause mentioned by you is printed on those papers.

[dr_TJ]

My car is under ICICI car loan.
No part-payment facility available and hefty 5.9% Pre-closure penalty on the remaining amount.
For sure, I will stick to SBI car loan in future.
I will sell my car and close the ICICI loan and never opt for ICICI car loan again.

[aswin ajith]

Originally Posted by dr_TJ

My car is under ICICI car loan.
No part-payment facility available and hefty 5.9% Pre-closure penalty on the remaining amount.
For sure, I will stick to SBI car loan in future.
I will sell my car and close the ICICI loan and never opt for ICICI car loan again.

Hi dr_TJ,

I just got myself a car loan from ICICI bank for my new car. In my agreement, the bank has stated that I can do part payments 2 times with 12 months break between them within the loan period with zero penalty. I can also completely close the loan off after 6 months into tenure again with zero pre closure penalty.

In my case, talked to SBI and they refused to even negotiate with me on the interest rate part and other terms and I have had poor experiences even otherwise. Dealing with SBI is a major headache and I have had it with them.

Note : Been banking with ICICI seamlessly for the past 8 years. I also got the lowest interest rates across all banks I talked to from ICICI. Heck, I have a salary account with HDFC and even then they failed to match the terms that ICICI offered.

Cheers !!!

[dr_TJ]

Originally Posted by aswin ajith

Hi dr_TJ,

I just got myself a car loan from ICICI bank for my new car. In my agreement, the bank has stated that I can do part payments 2 times with 12 months break between them within the loan period with zero penalty. I can also completely close the loan off after 6 months into tenure again with zero pre closure penalty.

In my case, talked to SBI and they refused to even negotiate with me on the interest rate part and other terms and I have had poor experiences even otherwise. Dealing with SBI is a major headache and I have had it with them.

Note : Been banking with ICICI seamlessly for the past 8 years. I also got the lowest interest rates across all banks I talked to from ICICI. Heck, I have a salary account with HDFC and even then they failed to match the terms that ICICI offered.

Cheers !!!

In my case, SBI is doing well. Only good thing about ICICI was it's loan taking procedure was very seamless. Minimal documents and no bank visits required.

Lets see how things go in the future.

[Ramon]

Originally Posted by aswin ajith

In my case, talked to SBI and they refused to even negotiate with me on the interest rate part and other terms and I have had poor experiences even otherwise. Dealing with SBI is a major headache and I have had it with them.

The reason for refusal is they (branch functionaries) don't have the permission to negotiate on interest rates with the customer.

As for preclosure on car loans, earlier SBI didn't have it. But now (for more than a couple of years) SBI has a preclosure clause as below.

"Charges @1% on part payment amount (plus GST) will be levied quarterly in Fixed Interest rate car loan if prepaid within 24 months from the date of disbursement."

One of my experiences from the other side - Dealer commissions are given to the dealer reps if they source a car loan from their end and route it though a bank.

At my earlier branch when I was in the account opening seat, we used to get car loan customers almost every week, including those sourced by the dealer. Many of the customers brought in by the dealer would be first time customers with the bank with no existing relationship. On boarding a new customer requires quite a few things to be done and at a fast clip too as the loan needs to go be disbursed for the car to be delivered. A good portion of these loans would be closed within 6 months. Later on we came to know that most of those who preclosed were not really in need of a loan, but they were nudged into taking the loan by the dealer rep so that he could get the commission.

The bank loses out on interest income when these loans are preclosed, and on top of that the dealer commission has to be paid.

[som9729]

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?

Have you contacted their call center or just contacted the branch?
As I understand, locals/credit card etc are centralised & most branches have no power in these matters.

[nisshith]

Hi I am surprised no one raised this, but there are loans which does offer prepayment but for the full amount+interest which was initially calculated based on the interest rate and the loan amount. For example if is say you took a loan of 5Lakhs and then eventually after all the EMI the total payment was of 6 Lakhs. Then in order to prepay the loan you have to pay full 6Lakhs. I have had that situation with one of my relatives who took a personal loan.
In this case preclosure of the loan does not have any advantage as you are anyway paying the same amount. Banks do this to make sure that they earn profit even if the loan is pre-closed.