Why Banks Hate Loan Prepayment?

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Do you know what the problem with a banks is? You just don’t know how to please it. And when they are not pleased it sure spells fines, litigation and extra stress for your already stressed up life. Just consider this; if you decide to close your loan for your house and go to your bank to prepay your loan outstanding, they won’t be receiving you with smiling faces. They just hate I-want-to-prepay-my-loan guys like you. Can you believe it?

Your banks just won’t encourage you to prepay your loan even if you have the means to do it. So, if you are planning to close your loan by prepaying, just think over it twice because what await you will be prepayment fines and loads of paper works. Hey, your life just got worse.

So, why does your bank dislike prepayment? This is because if you prepay your loan, their income flow is blocked. If your loan was for ten years, imagine the income that they would lose if you prepay the amount after five years. Your bank will also lose on five years of interest.

Things You Need to Know about Prepayment

If you are planning to prepay your loan, here are the things that you should be aware before doing so.

Prepayment Charges: Actually the bank imposes a penalty if you want to prepay the loan. It might be 0.5% to 2% of the remaining unpaid loan amount. If you try to close the loan early on, then the percentage of loan outstanding will be huge and you would incur a loss by prepayment.

Interest Rate: Mostly interest rate is the main factor for considering prepayments. If the interest is higher then we must be paying that amount for the loan. It would seem profitable to pay of the loans when interest rate is considerably lower. However, your decision must not depend solely on the interest rate. It must be based on the prepayment charges, the loan tenure and the amount outstanding.

The major part of EMIs for the first years is used to pay the interest on the loan. Towards the latter period we start paying the principal amount. Our saving comes if we can avoid paying the interest. Therefore if we prepay towards the end we would be paying the principal that we must pay anyway. Besides, the banks charge a penalty which adds to the loss.

Tax Benefits: These housing loans have a tax benefit. If you prepay the whole amount much earlier, you cannot enjoy the tax benefits that come under Section 80C. Therefore, before prepaying take this in to account and see if prepaying your loan is beneficial than the tax benefits you get from it.

Ownership: The major advantage of prepaying your housing loan is that you get possession of the house. You get to be the owner a bit earlier. More than a prestige issue, this helps you to re-sell it or take further loan for any immediate expenditure etc.

Prepay Partly: You can prepay in lump sum or you can pre pay partly. One advantage of prepayment through parts is that every prepayment goes into paying your principal amount. Once this principal is reduced the amount you need to pay as interest also goes down.

Before deciding to prepay your loan just weigh all your options. See if you are actually losing by it. Do not take just one factor while deciding to prepay. Consider the costs involved from all possible sides then take your decision. If you are planning to take a house loan make sure you take it from a bank that do not have prepayment charges or a bank that doesn’t over penalize you for prepayment of your loan.

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