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The RBI has shown its displeasure in past on prepayment charges and has been advising the banks against it. The prepayment penalty for public sector banks is about 1% or less, while it can be anywhere between 1% and 3% in private banks. According to source, banks do not charge any prepayment penalty if you prepay using your own sources.
Prepayment implies closing the loan earlier than planned. For a financial institution, a prepayment results in the loss of interest income and therefore prepayment charges are sometimes applicable. Prepayment penalties can be negotiated if you have a good credit history. The penalty is calculated on principal and the prepayment penalty for public sector banks is about 1% or less while it can be anywhere between 1% and 3% in private banks.
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Borrowers who seek to pre-close their home loans are now being asked to give evidence of their source of funds. Most lenders levy prepayment penalty only if a home loan borrower is pre-closing the loan with borrowed money. According to financial planners, the easiest way to prove that the fund belongs to you is a bank account statement. If you fail to prove the origin of the fund, you should insist the lender for a one-on-one discussion.
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Nice article, but prepayment decision is plain and simple. A person having a home loan should have a interest in the range of 8 to 12%. suppose his loan agreement says that he will have penalty, say 3% against pre-payment. It shall be noted that if he does not go for prepayment, he anyways will have to pay similar interest as penalty in next 2 or 3 months.
i have a loan of 20L at 9% ROI, if i have 1L to spare, the penalty @ 2% will be 2000rs, which if i dont prepay, will attract an interest if 750 every month, and eventually will be paying more than 2000Rs in interest within the next three months. good option is to prepay, depending on the interest and tenure left. A person not going for this option means, the person can grow his hard cash money more than what his loan costs him.
It relly does not matter if the bank attract charges against them or not. all this things have been mutually agreed upon in the agreement. one should not forget, that he got his loan at the time when he required, and should be thankfull to the bank. all the faults or cheats in terms terms and conditions are the persons problem, who overlooks them during agreement.
Hi Veerdhawal,
I agree with you, we should be thankful to the bank but it doesn’t mean that if we get an opportunity to pre-pay our home loan with our own fund we should not do. By prepaying home loan we are just paying off the home loan and not ending our relation as a customer with this bank.
Prepayment penalty charges levied only for switching the home loan. If home loan pre-paid from own fund or income, you can save your money and pay off loan before loan period.
Thank you