To prepay or not

To prepay or not

The kind of loan you have taken will decide whether you should foreclose or stick to the EMI schedule. Foreclosing a loan may not always be a simple procedure or the best option. Here are the facts you should consider before doing so.

When should one foreclose a loan, if one can?

The kind of loan you have taken will decide whether you should foreclose or stick to the EMI schedule. Here are the three factors you need to consider before prepaying:

Unsecured debt: Be it a personal loan or a credit card loan, this should be the first to be foreclosed. Usually, such loans do not come with a part prepayment option.

Tax incentives: When it comes to a home loan, the advantages of prepayment must be weighed carefully against income-tax benefits. It is better to complete the tenure if the repayment of the principal increases the deduction amount under Section 80C.

Penalties: Do not let the high penalties for prepayment deter you because the interest on the EMIs will always be higher. However, if your bank imposes no penalty for partial prepayments, this option will substantially cut short your loan tenure and, at the same time, reduce the preclosure penalty if you anticipate being able to foreclose it later.

Is it better to prepay the loan as early as possible?

It is never too late to prepay a loan. For example, given the high interest rates of a personal loan, you stand to save even if you foreclose it with just six EMIs left. Many believe that it makes no sense to prepay a home loan midway into the tenure as, with time, the interest component reduces as a proportion of the EMI. However, the effective cost of the loan, or the interest outgo as a percentage of the remaining principal, stays the same whether it’s the 20th EMI or the 120th. Also, if you have a good relationship with your bank, you can negotiate a lower prepayment penalty.

How do I foreclose a loan?

Once you intimate your bank about the decision to foreclose, you will receive an e-mail outlining the penalties levied and the final amount due. However, it is not as simple as dropping off a cheque at your bank’s ATM. Foreclosure can only be carried out at designated branches. Instead of relying on the foreclosure statement for naming such branches, it is better to clarify with the customer care centre.

BankPersonal loanHome loanCar loan
ICICI Bankup to 5.25%2% on full prepayment5% or interest for the unexpired period
HDFC Bankup to 4%0% for prepaying up to 25% of the principal in a year, or else 2%3-6% depending on unexpired tenure
Standard Chartered5%Rs 600 per payment for part payment or 2.5% for preclosureN/A
State Bank of India0% for prepayment after 6 months0% if prepaid, fully or partly, with one’s own sources, or else 2%2% of the prepaid amount
Bank of Baroda0%0% if prepaid with own savings or windfall gain, or else up to 2%0%
All figures show the prepayment penalties imposed as a percentage of the principal outstanding