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What is prepayment exactly?
Prepayment refers to repaying the entire outstanding loan amount before the original loan tenure ends that what is prepayment. It allows borrowers to completely close the loan and become debt-free, avoiding future interest payments.
Fincal EMI calculator With Prepayment Online or FIncal Mobile App will provide you this functionality on to get rid of tiresome job or visit to bank to calculate forecasted plan of of your loan closure. Fincal EMI calculator provide you best solution to visualize your EMI + principle + interest+ prepayment graph.
Key Features of Prepayment
- Full Loan Settlement: The borrower pays off the full principal amount, along with any outstanding interest and applicable charges.
- Interest Savings: Since the loan ends earlier than scheduled, you save on the interest you would have paid for the remaining tenure.
- Penalties/Charges: Some lenders charge a prepayment penalty, usually a percentage of the outstanding loan amount. Check your loan agreement for details.
- Immediate Financial Impact: Requires a significant lump sum amount to settle the loan.
Types of prepayment
Prepayments can be categorized as complete or partial, and can be made by individuals, businesses, or other organizations.
1. Complete prepayment
Paying off the entire balance of a debt or liability before its due date
2. Partial prepayment
Paying off only a portion of a debt or liability before its due date
- Individual prepayment: When an individual pays off a debt, such as a credit card or mortgage, before the due date
- Corporate prepayment: When a business pays for goods or services before they are delivered
- Taxpayer prepayment: When a taxpayer pays taxes before the due date, such as when their employer withholds taxes from their paychecks
3. Prepayment types by payment method
- Two-party prepayment: When a customer pays with cash or check
- Three-party prepayment: When a customer pays with a credit card
Prepayments can be for goods and services, or to settle a debt. They can be recorded as assets on a balance sheet.
Advantages of Prepayment
- Debt-Free Sooner: Eliminates financial liabilities earlier.
- Saves on Interest: No further interest accrues once the loan is closed.
- Improves Cash Flow: Frees up money previously allocated to EMIs for other purposes.
- Reduces Financial Stress: Offers peace of mind, especially for high-interest loans.
Disadvantages of Prepayment:
- Prepayment Charges: Lenders may impose penalties for closing the loan early.
- Liquidity Impact: Using a large sum for prepayment might reduce your financial reserves, affecting your ability to handle emergencies or invest elsewhere.
- Opportunity Cost: If the lump sum used for prepayment could have earned a higher return in investments, prepayment might not be the best financial decision.
When to Consider Prepayment?
- When you have a substantial surplus and no better investment opportunities.
- If the loan interest rate is higher than the returns from your investments.
- When there are minimal or no prepayment penalties.
Steps to Prepay a Loan:
- Check Loan Agreement: Confirm prepayment policies, penalties, and procedures with your lender.
- Calculate Savings: Use a loan calculator to determine how much interest you’ll save.
- Inform the Lender: Notify your lender about your intent to prepay.
- Settle Dues: Pay the outstanding principal, applicable interest, and any charges.
When Do Prepayment Charges Apply?
- Home Loans 🏡 – Only for fixed-rate loans, not for floating-rate loans.
- Personal Loans 💳 – Usually charged by banks & NBFCs.
- Car Loans 🚗 – Prepayment charges apply if repaid before tenure ends.
- Business & Education Loans 🏦 – Charges vary by lender.
- Credit Cards (EMI Purchases) 💳 – Early closure of EMI plans may have charges.
Typical Prepayment Charges in India
| Loan Type | Prepayment Charges |
|---|---|
| Home Loan (Floating Rate) | No charges (as per RBI rules) |
| Home Loan (Fixed Rate) | 1% – 3% of outstanding loan |
| Personal Loan | 2% – 5% of outstanding loan |
| Car Loan | 2% – 6% of outstanding loan |
| Business Loan | 2% – 4% of outstanding loan |
| Credit Card EMI | 2% – 3% of remaining EMI amount |
RBI Rules on Prepayment Charges
- No Prepayment Charges on Floating Rate Home Loans – As per RBI guidelines, banks & NBFCs cannot charge prepayment fees on floating-rate home loans for individuals.
- Fixed-Rate Home Loans Can Have Charges – Banks can charge 1%–3% if a borrower prepays from external funds (not from their income or savings).
- No Charges for Own Funds – If you prepay a fixed-rate loan using your salary, savings, or bonuses, banks may waive charges.
How to Avoid or Reduce Prepayment Charges?
- Opt for Floating Rate Loans – No prepayment fees for home loans.
- Negotiate with the Bank – Some banks may waive fees for loyal customers.
- Use Own Funds – Prepay from salary, bonus, or savings to avoid extra fees.
- Check Loan Terms Before Signing – Some banks offer zero prepayment charge loans.
- Wait for Lock-in Period to End – Some loans have a 12-month lock-in period before allowing free prepayment.
Should You Prepay Despite Charges?
YES, if prepaying saves you more in interest than the prepayment fee. Always compare the prepayment charge vs. interest saved before deciding!
Hope you get know about open Home Loan EMI Calculator with prepayment