Loans are more in demand than ever before. This is probably due to the ease of getting one today as compared to years gone by. Whether we want to buy a house, a car or even fund our education overseas, we tend to take out a loan to fund our ambitions. Besides, there are loans available that can meet almost every requirement. A Personal Loan for financial emergencies, a Home Loan for buying a house, a Car Loan to buy a car, an Education Loan to get our degrees and so on.
Usually, when we take out a loan, we always opt for a well-planned repayment schedule depending on our financial conditions. However, sometimes we may find ourselves with a lot of disposable money and decide to close our existing loans with it. While prepaying your loan has many advantages, you may be levied with certain fees and charges for doing so.
Additional Reading: Should you invest or prepay your loan?
Okay, so you’ve taken out a Car Loan to buy yourself a new set of wheels and now you want to prepay your loan. Sounds good, but first, you need to know all about prepaying a Car Loan.
There are several reasons why people prefer to prepay their Car Loan before completion of the loan tenure. The most common reason is the different benefits associated with prepaying a Car Loan, which makes this option sound logical to most customers.
However, before you decide to prepay your Car Loan, you need to analyse how this decision can impact you in the long run, especially in terms of financial gains. Additionally, you need to have a good understanding of the calculations involved in prepayment of a car loan in order to reach an informed decision in this regard.
Benefits of Prepaying a Car Loan
Prepayment is purely a matter of choice based on the borrower’s financial situation. The key benefits that one looks for when prepaying a Car Loan include:
- It frees up a substantial chunk of monthly earnings, which were being paid as EMIs towards the loan. This freed-up money can be invested in more lucrative investment tools that are available in the market
- Prepaying reduces the total amount that would have otherwise been paid towards the loan since the total interest paid back would decrease.
Additional Reading: Foreclosing Your Car Loan: Is It A Good Idea?
Provisions for Prepayment
Most banks discourage prepayment as it would deprive them of earnings in terms of interest on the Car Loan, which usually goes up to 14% or more. Generally, these are the prepayment conditions that most banks usually put forth (these vary from bank to bank):
For fixed interest Car Loans, there is a prepayment penalty levied, which is usually in the range of 3-5% for private financiers and 2% for public sector banks. Additionally, service taxes are also applicable on such payments.
For floating rate Car Loans, there are no prepayment penalties as per directives set by the RBI. So, one can prepay and migrate the loan to a bank that offers a lower rate of interest as compared to the existing loan.
Most banks, however, do not permit prepayment during the first six months of the repayment tenure.
Additional Reading: Your Car Loan Interest Rate Guide
Calculations by Banks
There are different means of calculating the outstanding amount in case of different banks.
The effective interest rate in most cases is a function of the reducing balance method that is employed for calculations. The principal amount that is being repaid is reduced from the outstanding Car Loan amount.
Thus, when the customer makes a payment, the interest paid is calculated on the balance outstanding principal at that point of time. This calculation is made on a monthly, quarterly or yearly basis by different banks.
There are plenty of Car Loan prepayment calculators available online if you have trouble with the calculations. Most of these calculators are based on a basic instalment calculating model. They usually consider the following parameters:
- Interest rate of the loan (at the time of obtaining it)
- The total tenure for which the loan was taken
- Additional costs, prepayment penalties, etc.
- The total amount to be paid to the lender after the tenure ends
- Amortisation agenda
Additional Reading: Your Car Loan EMI Calculator Guide
A Car Loan prepayment calculator will take into consideration the parameters mentioned above and provide you with the total amount that you’ll have to pay the lender if you’re planning to prepay the loan.
Let us now take a look at the prepayment clauses put forth by three of the leading banks in our country:
SBI is one of the preferred banks for Car Loans in India, thanks to the great deals (such as low interest, low EMI, etc.) that they offer.
If you have an SBI Car Loan or you’re planning to take one, then the good news is that they do not have any prepayment penalties or pre-closure charges attached.
Attractive interest rates, long tenures and up to 100% financing make ICICI Bank Car Loans popular.
As far as prepayment is concerned, you can choose between part prepayments and full prepayments
For part prepayments
- Prepayment not allowed in the first six months of the loan tenure and the last 12 months before the tenure ends
- 6% of the outstanding amount is applicable if part payment is made between the 7th and the 12th month
- 5% of the loan amount is charged for part payments made between the 13th and the 24th month
- 3% of the loan amount is applicable for part payments made after 24 months
- Minimum part payment amount should be equal to one EMI. Maximum amount is capped at 25% of the principal outstanding
- Part payments can be made only twice during the loan tenure and once in a year
For full prepayment or pre-closure of the loan,
- No charges applicable after 18 months for salaried individuals and 24 months for self-employed individuals
- Else 5% of the outstanding principal or interest, whichever is lower, for the remaining period of the loan, will be charged
HDFC Bank Car Loans are preferred for their quick and easy application and disbursal process, economical interest rates and excellent service.
Here are the pre-closure charges for HDFC Bank Car Loans:
- Foreclosure is not allowed within the first six months
- 6% of the outstanding principal from the 7th month to the 12th month
- 5% of the outstanding principal between the 13th and the 24th month
- 3% of the outstanding principal after the first 24 months
Prepayment charges are at the sole discretion of the banks. Some banks don’t usually charge a prepayment penalty after a certain period of the tenure.
And Finally…
While deciding to prepay your Car Loan, you’ll need to consider these seriously:
- Study all the details of EMIs paid and the outstanding amount as indicated in the statement by the bank.
- Make a loan amortisation table on an excel spreadsheet.
- Fill in the details and then evaluate the current situation accurately. This shall provide insights into the advantages of repaying the loan.
- In case there are additional outstanding Home or Educational Loans, you should try to prepay the Car Loan on priority as there are no tax benefits and the interest rates are high too.
Bonus Read: The Future Of Car Loans In India
Prepaying your outstanding Car Loan when you have the means to do so is a smart financial move. However, pay attention to all the charges that may be involved and make sure you are aware of all relevant details regarding the prepayment. Good luck!