Prepayment implies closing the loan earlier than planned. Most banks impose a penalty on prepayment. However, very recently SBI has announced that it will be dropping prepayment charges on its loans. This announcement came the next day after it hiked its base rate by 0.25%. It also withdrew its teaser loan schemes along with this announcement.
Coming back to the subject at hand, in the case of other banks, prepayment can be charged in two cases. One, when you prepay with your own sources. In this case, you issue a cheque from your account. Second, you refinance the loan from another bank.
Impact of prepayment
The prepayment penalty for public sector banks is about 1% or less while it can be anywhere between 1% and 3% in private banks. In many cases, banks do not charge any prepayment penalty if you prepay using your own sources.
The penalty is calculated on principal. Hence if you have 20 lakhs of loan outstanding, the penalty could be from 0 to Rs 60,000 depending on banks.
Now, whenRead More »from Will prepayment penalty become a thing of the past?