What is a Prepayment Penalty_WC
What is a Prepayment Penalty?
A prepayment penalty is a fee that most lenders charge a borrower when the borrower opts to pre-pay a portion of the loan or clear the entire loan. Lenders charge a prepayment penalty to stop borrowers from closing their loans early. But, why do lenders do that?
Here, you will get to know regarding the prepayment penalty on Home Loans – what is the Home Loan prepayment penalty? Why do lenders penalise borrowers for paying off their loans early? How can one save themselves from having to pay a prepayment penalty on Home Loans? In this article, we answer all these questions.
Home Loan Prepayment Penalty_WC
Home Loan Prepayment Penalty
If you have availed of a Home Loan, you would want to become debt-free as soon as possible. Most Home Loan borrowers want to part pre-pay their loan whenever they have extra funds so that they can reduce their principal amount and therefore, the total interest outgo as well as become debt-free sooner than they had anticipated.
A Home Loan prepayment calculator can assist you in making an informed decision about whether or not prepaying your home loan is the best option for you.
Why Do Lenders Charge a Home Loan Prepayment Penalty_WC
Why Do Lenders Charge a Home Loan Prepayment Penalty?
When a lender lends you money to buy a home, they take a risk. This risk is much higher during the earlier years when a borrower's contribution to a home's value is only a minuscule portion of the total value. Thus, during the earlier years of loan repayment, the risk involved for a lender is much higher and therefore, to compensate for this loan, lenders charge interest. When borrowers opt for part pre-payments or foreclosure, lenders lose out on the interest fee. Thus, to protect themselves, lenders introduce the concept of a Home Loan part prepayment penalty in a Home Loan agreement. By way of a prepayment penalty, lenders can recuperate at least a part of the money they would lose in case of part prepayments and foreclosures.
How Do Lenders Charge Prepayment Penalty?
Here are some different ways in which lenders charge a prepayment penalty.
- Most lenders ask Home Loan borrowers to pay a small percentage of the outstanding principal amount. This percentage is higher if a borrower chooses to close their loan during the initial few years.
- Sometimes lenders ask borrowers to pay a few months' interest as a prepayment penalty.
- Sometimes lenders have a fixed prepayment penalty. For instance, if you choose to prepay your loan during the first year, they will charge you Rs.50,000. For the second and third years, these values may come down to Rs.40,000 and Rs.30,000, respectively. Please keep in mind that these values are hypothetical and the prepayment fee varies from lender to lender.
How Can You Avoid Paying a Prepayment Penalty on Home Loans?
If you are planning to avail of a Home Loan and think you would want to pay it before the end of its tenor, opt for a Home Loan with floating interest rates.
As per the Reserve Bank of India guidelines, lenders cannot charge a prepayment penalty in the case of Home Loans availed of at floating interest rates by individual borrowers. Further, those at fixed interest rates can also part-prepay or foreclose their loan without paying any prepayment penalty if they use their own money to close the loan. However, if they borrow the money to pay off the loan, they will have to pay a penalty.
Borrowers must always remember to collect a No Due Certificate from their lender after prepaying/foreclosing their loan. The No Due Certificate is a handy document that you will need often.
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