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RBI asks banks not to levy penalty on pre-payment of loans

Good news, Lets see how the banks react.

Read more at:
http://economictimes.indiatimes.com/...campaign=cppst

This is a very welcome step on the part of RBI.
While I hope all the PSU banks will follow the directives, but it needs to be seen how the private banks react to this circular.

I also get caught in HDFC bank loan closing circus. To minimise this headache can we do following thing?

Suppose I have loan balance of 2,00,000 rupees. Can I prepay for Rs. 1,80,000 and remaining 20,000 will be paid through EMIs? Will this work to save pre-closure charges?

SBI allows this. Not sure about HDFC. I doubt that they have removed pre-payment penalty even after RBI notifications.

Enquire it with your bank.

Bank of Baroda allows prepayment and foreclosure without penalty

I am in process of closing my HDFC car loan for my XUV. Spoke to the Customer service who has asked me to go to the service centre and submit an application after which someone will revert within 7 working days

As per documents with me, the preclosure should be 3% of principle. Lets see if RBI's directives are being followed.

Will update on how's it progressing.

Any update on this?

I found the following RBI Circular:

http://rbidocs.rbi.org.in/rdocs/Noti...99140714LA.pdf

Does it mean car finance companies (not banks) should not charge prepayment penalty?

The guidelines applies to floating rates only. So if you have a loan with a floating rate then you can fight it out with your bank incase they are ignorant about the revised guidelines.

I applied for Axis bank car loan and was asking them about prepayment and preclosure. Agent said, they have a prepayment offer and hence no need to preclose the loan. I can just do a prepayment for the loan amount minus the last EMI amount and the next month loan will auto close.

Can someone confirm is it true? Is there any catch in this method (compared to the preclosure) that I don't see?

I guess the preclosure charges, if any, and the extra forms/procedures/bank visits etc. that I can avoid will compensate for any extra savings (last month interest) that I might make in preclosure.

Never believe the agent and speak to the Bank directly about your concern. The agents will promise the universe and once they get the loan approved and commission pocketed, they just move on to the next one.

In principle, if you are on floating rate of interest, there should not be any prepayment or foreclosure charges. But certain banks during some special schemes can get this included in the agreement, so read through the document.

Thanks dass. Sorry, I caused confusion; the person I am interacting with is a bank employee, not an outside agent. I just verfied it once again. They indeed have some special scheme for prepayment is what he told me.

I want to know if there is any difference between preclosure and prepayment (full amount minus the last EMI).
1) Does the laon get auto closed after last EMI?
2) Will there be any difference in the amount that I am supposed to pay between preclosure and prepayment (full amount minus the last EMI) methods?

Are you referring to part payments as Prepayment? Part payment is when you can make pay some amount over and above of your normal EMI to the loan account and it gets adjusted to you principle, without any interest component, this will save you some money in the long term.
Pre closure is when you close the loan completely before the loan has run its due course. If you have taken the loan for 5 years, then if you close it with 2 years, you will save money in terms of interest payable on the loan. Beyond two years, I believe the savings on interest are marginal, so you may not benefit much.

The more part payments you make, the lesser interest you pay, leading to lesser tenure to close the loan. The amount you have to pay finally will differ.
Pre closure done earlier to the loan opening date will also save you lot of interest. So your choice.

Ps - Hope I have not confused you more than you started off with.

I meant part payment.

The bank employee says I can do part payment and no need for preclosure. This is what I want to make sure.

Consider this scenario, I have a 5 year loan and after two years I have money to payback the loan. What are my options?

Will there be any difference in the amount that I pay between 1) I preclose the loan completely and 2) I do part payment of almost all the principle except some and the loan auto closes in a months time.

I am not sure if I am confused or not, so may be I am really confused :).

On this scenario.. it is ALWAYS better to pay off the loan. Remember that the car is a depreciating asset and the higher the amount we pay towards the interest, the lesser we would gain out of the ownership. There is no need to make part payments in this case, just close the whole loan.

The option 2 you mention, I do not think there is any benefit in doing this, unless of course you have a fixed interest rate, in which case the pre closure charges will apply.

Okay, details emerge, finally!!!. There is a catch; as always. Part payment can be done only twice every year and only upto 25% of the outstanding principle. If I need to go beyond that they charge a cool 5% as penalty, fantastic. Pre closure is allowed only after 24 months. This is Axis bank, and HDFC is giving four part payment per year and free pre-closure after 18 months.

I was thinking I could avoid the hassles of preclosure (branch visits/form filling etc.) and go the part payment route. Now need to know the charges for pre closure before the set limit.