Car loans with no prepayment penalty
Private banks can match the interest rates of PSBs, particularly if you hold an account with them, but their prepayment penalties makes them a bad option when looking for a car loan.
Banks lure in customers through discounts on interest rates and waiving processing fees, but a crucial, yet often overlooked factor, is the prepayment charge. Currently, private banks continue to charge it while nearly all public sector banks have done away with it completely. A prepayment charge is highly restrictive and, depending on the increase in your ability to repay a loan in future years, can severely impact the total cost of your loan. Let’s understand how with the help of the following example:
Currently, both Axis Bank and Dena Bank are offering the same rate of 11% on their car loans. However, Axis Bank is levying a 10% charge on all prepayments made before six months of the loan and 5% on prepayments after six months, while Dena Bank is levying no such charge. So if you were able to prepay say, Rs1 lakh of Rs5 lakh, two years into your loan, the Dena Bank loan would immediately become Rs5,000 cheaper than the Axis Bank. But what if you decided not to prepay the amount – and use the Rs1 lakh on something else – simply because of the Rs5,000 you had to pay? Here’s how it would work out.
|Bank||Total loan||With interest||Prepayment after 24 months||Total outgo|
|Axis Bank||Rs5 lakh||Rs652,273||Nil||Rs652,273|
|Dena Bank||Rs5 lakh||Rs652,273||Rs1 lakh||Rs620,338|
Sooner the better
Another frequently asked question is when the right time to prepay your car loan is. The simple answer is the sooner the better. If you were to prepay Rs1 lakh on a five-year Rs5 lakh loan (@11% interest), you’d save around Rs32,000 if you prepaid in year two and just Rs19,000 if you prepaid in year three (to find out how much prepayment can save you, use this calculator). This is also apparent in the way banks levy the prepayment charge. With many private banks, the charge is higher in earlier years and lowered later on. In either case, however, whether sooner or later, prepayment of a car loan is a no-brainer because there is no tax deduction available as there is with a home loan and the loan has a fixed rate. For these reasons alone, the prepayment charge levied by private banks is stifling.
Here is a list of 10 banks and their prepayment policies:
|Bank||Tenure||Interest rate||Processing charge||Prepayment penalty|
|Axis Bank||5 years||11%||Rs3,500 to Rs5,500||5-10% of prepaid amount|
|Bank of Baroda||7 years||10.50%||0.5% to 0.75%||None|
|Corporation Bank||7 years||10.25% to 10.45%||1%||None|
|DCB Bank||5 years||15.25%||None||5% of prepaid amount|
|Dena Bank||5 years||11% to 12%||None||None|
|HDFC Bank||7 years||11%||Rs2,825-Rs5,150||Not in first year, 3-5% thereafter|
|ICICI Bank||7 years||11.5% to 16.5%||Rs2,500 to Rs5,000||Lower of 5% of principal outstanding or interest outstanding for unexpired period|
|IDBI Bank||5 years||11.25-11.5%||Rs1,000||1%; none after 6 months|
|State Bank of India||7 years||10.25%||0.51%||None|
|Union Bank of India||7 years||10.70%||0.50%||None|
*correct as on September 30, 2013