No interest relief on foreclosure of a car loan

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 instalments would be less.

BHPian sen2693 recently shared this with other enthusiasts.

I recently got a car loan from a nationalized bank. The rate of interest felt marginally better than another 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 had no plans to close it anytime in the near 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 instalments 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 did I just get 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?

Here's what BHPian abhi_tjet had to say on the matter:

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.

Here's what BHPian JoshMachine had to say on the matter:

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.

Here's what BHPian anandhsub had to say on the matter:

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.

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