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RBI directive makes prepaying your car loan beneficial

RBI directive makes prepaying your car loan beneficial

The RBI’s directive to scrap foreclosure charges would help you pre-pay your floating rate car loan sans the 3-6% charge levied currently to terminate loans before term.

If you have been avoiding pre-paying your car loan, or other loans, for the fear of a pre-payment penalty, you can now heave a sigh of relief as the Reserve Bank of India (RBI) has notified banks not to levy foreclosure charges on floating-rate loans.

“Banks will not be permitted to charge foreclosure charges or pre-payment penalties on all floating-rate term loans sanctioned to individual borrowers, with immediate effect,” stated Prakash Chandra Sahoo, Chief General Manager of the RBI.

Though home loan borrowers haven’t been subject to foreclosure charges since the past two years after the RBI directive in June 2012, car loan takers would be the biggest beneficiaries of the measure.

Some private banks have been charging as much as 6% as a pre-payment penalty on car loans. Not just full pre-payment, but part payment was penalized too up to the extent of 3-5%, depending on the period when you prepaid.

The move gains importance as banks have recently extended the maximum car loan term to 7 years to increase the affordability of those seeking such loans. But car owners typically use their car for 5 years before changing to a new vehicle. This means that due to the heavy foreclosure charges, people would still be servicing their car loans instead of pre-paying.

Personal (fixed-rate) loans unaffected by RBI directive
However, personal loan borrowers would still have to bear the steep pre-payment penalty of 3-6% as these loans are fixed-rate loans and wouldn’t be covered under the RBI notification.
Banks need to clarify whether the loans would be able to be pre-closed within the period of 6-12 months, as right now people were discouraged to do so by extremely steep foreclosure charges.

It remains to be seen whether loans would get costlier after the RBI move as the banks would factor in the foreclosure charges that they will now have to forego.

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