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Prepayment charges on auto loans

Most banks would charge you some prepayment penalty when you opt for the option of prepaying the loan amount. This is penalty is levied because when you prepay your loan, the bank is losing the interest income it would have got from you.

Apnaloan.com Research Bureau

10 Aug 2007

Most banks would charge you some prepayment penalty when you opt for the option of prepaying the loan amount. This is penalty is levied because when you prepay your loan, the bank is losing the interest income it would have got from you.

Ideally, you should go for a bank that does not charge you any prepayment penalty, but in case there is no bank that offers this facility, you should go for one that charges the minimum.

The idea of prepayment arises from the fact that you can get rid of your debt whenever your finances improve. Also, it is a great way of reducing your interest cost. Moreover, if there is another bank that is offering you a better rate(lower rate) you can shift your loan to that lender.

In fact, many banks even cap the amount (or a certain percentage) that you can prepay at one go. That is, the bank may put a clause that if you pay more than 5 per cent of the outstanding principal, you may attract a certain fee. This basically implies that banks would like to discourage you from prepaying the loan, as it results in a loss of interest income.