Personal loans with no prepayment penalty
The RBI only ordered banks to stop levying a penalty on prepayment for floating rate home loans. Yet, some banks, mainly in public sector, have removed the charged completely.
There are better alternatives to a personal loan. Banks will give you a lower rate of interest if you have something of value to show as collateral. Fixed deposits are one option, your property is another. But if you can’t provide any collateral, a personal loan is what you have left. So if you need to take on this debt, ensure you’re in control of the repayment schedule. There are only a couple of things you need to check in the banks’ terms and conditions before you decide. First let’s be clear about what the penalty is, though.
What is it? A prepayment penalty, as it implies, is a charge on any amount paid before time. So if your EMI is Rs10,000 a month for five years, but you want to repay Rs50,000 at one go, the bank will charge up to 4% of the outstanding amount. So if, let’s say, you have Rs1 lakh of the principal left to repay, you’d be charged Rs4,000. You could bargain for the removal of a prepayment penalty, but banks don’t budge easily.
Why it’s good? Personal loans are very expensive and unsurprisingly offer no tax benefits. Prepaying your loan means bringing lowering your EMI. For example, let’s say you’ve taken a loan for Rs2.5 lakh, to be repaid over three years at 17% per annum. If, in the 14th month, you can repay Rs50,000 extra, your total loan outgo would go down by Rs15,000.
Three types of clauses
Banks will have one of three clauses in personal loan agreements. There will either be a prepayment penalty, a partial waiver or no penalty at all.
No penalty If a bank says it will levy no charge on prepayment or partial prepayment, this is a good sign. It means that if you get a bonus cheque or money from any other source, you can use it to repay your loan.
Partial waiver A partial waiver may be good enough if the rest of the terms suit you well. Some banks, for example, will let you repay 25% of your loan without any charges. If this is much more than what you think you can manage, it might not be a bad fit. No prepayment penalty would still be better, though.
Penalty These banks charge a penalty throughout the term. Unless they’re offering you much lower interest rate, it might be best to look at another bank. As you’ll find out in the list below, though, a prepayment penalty doesn’t mean a lower interest rate.
The conditions upon prepayment can be long, so we’ve included them below the table. In this table, which we’ll keep updated, you can find out which of the three clauses the bank you plan to approach is using.
This table was last updated on August 16, 2013.
|Bank||Interest rate||Prepayment clause|
|Axis Bank||15.00% to 24.00%||No penalty|
|Bank of Baroda||14.75%||No penalty|
|HDFC Bank||15.5% to 22.25%||Partial waiver|
|ICICI Bank||14.00% to 19.00%||Penalty|
|IndusInd Bank||Up to 23%||Penalty|
|ING Vysya||On application||Partial waiver|
|Kotak Mahindra||On application||Penalty|
|Oriental Bank of Commerce||13.75%||No penalty|
|Punjab National Bank||16% to 16.25%||No penalty|
|State Bank of India||18.20%||No penalty|
|United Bank of India||16.25%||No penalty|
Salaried: No prepayment during first year if you’re salaried. In case you are salaried, you will have to pay 4% of principal outstanding in case of prepayment during the second year, and 2% in the third year. No penalty thereafter.
Self-employed: No prepayment for first six months, with 4% charge on principal outstanding until the end of the second year. 2% charge during third year and no penalty thereafter.
The charge will be the lower of 5% of principal outstanding or interest outstanding for the unexpired period of the loan.
Part prepayment is not allowed at all. The loan has to either be prepaid in full or serviced for the contracted tenure.
Salaried: 4% of the principal outstanding after repayment of 12 EMIs.
Self-employed: 4% of the principal outstanding after repayment of 6 EMIs
No prepayment during first six months, 4% of principal outstanding thereafter. However, you may prepay up to 25% of the principal outstanding in a financial year without any charge. If the loan is foreclosed within 12 months of making the part payment, however, the 4% charge would apply.
Kotak Mahindra Bank
No prepayment during the opening six months. Thereafter, prepayment penalty of 5% on the principal outstanding will apply.