Prepayment Conditions for Car Loans - Foreclosure Process (2024)

If the borrower pays the loan amount well before the pay-off date, he is charged a certain penalty by the bank. Because the lender does not get the anticipated interest, the penalty usually acts as a compensation. The car loan foreclosure penalty amount depends on the principal outstanding, interest outstanding and also at what point of the tenure the loan is being paid off.

Prepayment and pre-closure could mean differently when it comes to penalty charges. Prepayments can be done in parts and pre-closure means foreclosure of the entire loan before end of the tenure. It is important that you are well-informed about the prepayment clauses and penalty charges before applying for a loan with a particular bank.

How do I calculate Car Loan Prepayment Charges?

Sometimes, prepayment can work to your advantage and sometimes not. For example, foreclosure of a car loan towards the end of tenure may not be favourable because the prepayment penalty may exceed the interest to be paid towards the loan. You can use an online car loan prepayment calculator to check your prepayment penalty based on the principal outstanding amount.

In a car loan prepayment calculator, you will have to enter details like the original loan amount, start date of the car loan, tenure, rate of interest and prepayment penalty. Some calculators will ask you to input the number of months left to pay back the loan and current EMI. Based on the information that you have provided, the car loan prepayment calculator will project by how much your principal balance is lowered, the interest savings and also the number of months by which the repayment term is shortened.

This information will help you make a wise decision when it comes to prepaying a car loan. In short, if the interest savings is greater than that of the penalty, you can proceed with the car loan foreclosure.

Two Types of Car Loan Prepayment

When it comes to car loan foreclosure, there are two broad types - part and full.

1. Part prepayment: When you are paying off a part of the car loan by making larger payments than the EMI, before the end of the tenure, then it is called part prepayment. By this, your principal outstanding will be reduced and also the EMI.
2. Full prepayment: When you are paying off your loan entirely before the end of tenure, it is called full prepayment. It is equal to closing off the loan.Some banks do not allow prepayment in parts for car loans. Also, make sure that you are informed about the new repayment schedule after you do a part prepayment.

What is the procedure for Car Loan Prepayment?

Follow the points below to know the procedure for car loan prepayment.

1. If you decide to foreclose your car loan, it is advised that you read the bank's loan document carefully. Some banks do not allow prepayment of car loan for at least a year after the loan is availed.
2. Once you are clear about all the foreclosure clauses, contact the bank directly. You may be asked to fill in a form for foreclosure. The penalty fee (if any) can be paid through ECS, cheque, drafts and also NEFT.

Should you prepay your Car Loan?

There are certain pros and cons to foreclosure that one must weigh carefully before deciding to pay-off the car loan. Here are some of the points that will help you decide on foreclosure.

1. Savings on Interest:Borrowers should consider the prevailing interest rate for car loans rather than the tenure when it comes to prepayment. Whether or not to close your loan is influenced by factors like the stage of payment you are at, the prepayment penalty and the interest rate.
2. Foreclosure Charges:The penalty for prepayment vary from bank to bank and is dependent on many factors. The car loan prepayment penalty can be charged as a flat rate or as a percentage of interest or principal outstanding. Borrowers must compare the penalty amount against the overall interest savings.
3. Consider all Options:Though it is a wise decision to pay-off your loan, you must make sure that the money is being put to good use. If you could invest the money somewhere and gain better profit than all interest savings that come through foreclosure, why choose to prepay the loan.