Imagine a situation where you have access to ample cash and want to prepay your loan partly or entirely, before your EMI tenure is over. You can refinance your loan and pay off a large sum of your loan to ease your financial burden. This is called prepayment of loan.

But, the bank charges a percentage of the principal amount in the form of prepayment penalty if you choose to prepay the loan. Here are some lesser known facts about prepayment penalty that you probably did not know.

What is Prepayment Penalty?

Banks and lenders allow up to 20% of the loan to be repaid each year. Suppose, you have taken a home loan, and you want to pay back more than 20% of the loan amount in one year. In this case, you will have to pay a certain percentage of the outstanding balance. If you are planning to take a loan, Bajaj Finserv offers Home loans at one of the lowest interest rates in India, with zero prepayment charges.

Why is it Charged?

If you prepay the entire loan amount way before your tenure finishes, then, banks and other financial establishments will lose out on all the interest payments they would have otherwise received had you stuck with your original repayment plan. Prepayment penalties are devised to save banks and lenders from the loss they have to incur when a borrower takes a loan and pays it off before the EMI tenure is over.

How Much is Charged?

A prepayment penalty, meaning the penalty you have to bear in the event of paying off a large amount of your loan to the bank, is usually signed as a contract between the lender and the borrower. Most public sector banks charge prepayment penalty of about 1% or lesser. In case of private banks, the charge is around 1% to 3%. The calculation of the penalty amount is done on the basis of the principal amount.

The prepayment penalty for home loans and the prepayment penalty for personal loans are not charged by most banks and financial lenders, as per the new RBI directives. Financial establishments like Bajaj Finserv charge nil prepayment charge and foreclosure charge for floating loans such as Home Loans, Vehicle Loans, Loan Against Shares, and Personal Loans.

Why Should You be Careful about Prepayment Penalty?

A prepayment penalty is something that most people are unaware of. There are situations when you find an additional source to repay the loan and close the loan account. In the event of prepayment, you might think that you have paid a large part of your principal, and expect a reduction in your interest charges. However, in reality, the repayment of interest happens in the initial years, and the principal is paid in the latter years. This is done by banks to prevent their interest cost from being lapsed, in case of prepayments.

Bajaj Finserv, a widely trusted financial institution, offers various benefits to the borrower, such as part-prepayment facility with no prepayment penalty, and instant loan approvals.

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