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Car loans with no prepayment penalty

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:

Big difference
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
Savings Rs31,935

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:

Car loans

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

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