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These days, it's quite easy to get a home loan, car loan, or personal loan. But once you've taken out a loan, you also have to repay it on time. This is repaid by paying a fixed EMI every month. When the EMI amount is deducted from your account on a fixed date every month, it's very frustrating. Consequently, people want to get rid of this hassle as soon as possible.

Whenever a large sum suddenly comes into your hands, people resort to prepayment with a lump sum to pay off the loan as quickly as possible. But when you prepay a personal loan, banks charge a penalty. Have you ever wondered why the penalty is applicable when the entire amount is paid in one go? Learn more about it here:

Why do banks charge a prepayment penalty?

When you prepay your loan early, you may think you've made a good decision. But from the bank's perspective, it directly results in losses. In fact, the bank calculates the loan interest based on the entire tenure, and the EMI is also determined based on that.

But as soon as you terminate the loan midway, the bank loses the interest it should have earned over the entire tenure. Since interest is the bank's primary income, this loss directly impacts its earnings.

To compensate for this shortfall, banks charge a prepayment penalty. This penalty is already stated in the loan terms. Some banks charge a fixed amount, while others charge a percentage of the prepayment amount. Therefore, it is always important to carefully read the terms and conditions before taking out a loan.

Prepayment charges are not applicable to all loans.

Prepayment charges do not apply to all types of loans. If your home loan is on a fixed rate, the bank may charge a penalty for prepaying it. However, according to RBI regulations, no prepayment charges are applicable on floating rate home loans.

Most banks charge prepayment fees for personal loans, but these fees vary depending on each bank's policy. Therefore, be sure to carefully review the terms and conditions before taking out a loan.

Make these important calculations before making a prepayment.
It's difficult to determine whether prepaying your loan early will be beneficial without calculations. First, check the loan terms to see if there's a prepayment penalty. If there's no penalty, prepaying is an easy decision. However, if the bank is charging a prepayment fee, do this simple calculation:

See how much prepayment penalty will be charged at what time.

Estimate the interest rate you'll have to pay on your remaining loan.

Subtract the prepayment penalty from the total interest.

If you still see significant interest savings after paying the penalty, prepayment is beneficial.

If the savings and penalty are approximately equal, your only benefit is the reduction of the EMI burden.

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