Conditions to Pre-pay your Car Loan

Prepay car Loan

Car loans are popular loans that are offered by a number of banking and non-banking financial organizations in the country for thepurchase of acar. Mostly borrowing loans is the most convenient way to buy a car and it is a fact that most of us are able to afford to buy a car because of good car loans being offered in the market. Depending on the person’s eligibility people can borrow car loan uptoRs. 1 Crore. The rate of interest charged by the banks for borrowing Car loan is 9% per annum. The Car Loan can be borrowed for loan tenure of 84 months. Borrowing loans arethe best way to buy a car. There are ways to ensure that you can pre-pay your Car Loan.

What is a Car Loan Pre-Payment?

Car Loan Prepayment is the payment done with an aim to close the loan account by paying the entire outstanding amount of the loan to the bank.

What are the Pre-Payment Charges?

Normally the banks charge a penalty when a person tries to fore-close or pre-pay the loan. The amount can be anything starting from 0% to 7% of the outstanding amount of the car loan borrowed. There are certain organizations who do not charge any pre-payment charges; therefore it is important that a person reads the foreclosure clause before signing the car loan agreement.

It is the choice of the borrower whether to make a prepayment or not. If the borrower has enough money then it is sane to make a pre-payment and close the loan account thanto keep paying the interest charged on your loan along with the EMI.

Another advantage of prepayingyour car loan is that you soon get free from the financial burden and can think about another investment options.

Provisions for Prepayment

Most banks discourage prepayment as it would deprive them of earnings in terms of interest on the Car Loan, which usually goes up to 14% or more. Generally, these are the prepayment conditions that most banks usually put forth (these vary from bank to bank):

For fixed interest Car Loans, there is a prepayment penalty levied, which is usually in the range of 3-5% for private financiers and 2% for public sector banks. Additionally, service taxisalso applicable on such payment.

For Car loan borrowed at floating rate of interest, there are no prepayment penalties as per directives set by the RBI. So, one can prepay and migrate the loan to a bank that offers a lower rate of interest as compared to the existing loan


Most banks, do not allow prepayment during first six months of repayment tenure.

Calculations of pre-payment charges by Banks

Different banks calculate prepayment charges differently depending on the outstanding amount to be paid by the borrower to the banks.

The effective rate of interest in many cases is afunction of reducing balance method that is used for calculations. The principal amount that is repaid is reduced from theoutstanding Car Loan amount.

Therefore, when a customer makes a payment the interest that is paid is calculated based on the outstanding principal amount at that point in time. The calculation is done on monthly quarterly or yearly basis depending on the bank.

There are a number of Car Loan pre-payment calculators making use of Letzbank Car Loan EMI Calculatorwill help you get acquainted with various stages of the loan at various time intervals which will enable you to decide you prepayment better. Most of the Car Loan EMI Calculator determine following parameters:

➤ Interest rate of the loan decided at the time of signing the loan agreement.

➤ The total Car loan tenure for which the loan was taken.

➤ Additional costs, prepayment penalties, etc.

➤ The total amount that is to be paid to the lender at the end of the loan tenure.

➤ Amortization agenda.

When you decide to make a pre-payment you must consider the following?

➤ Ask for a loan summary from the bank and study in depth various EMI and fee paid towards the loan.

➤ Make use of Letzbank Car Loan EMI Calculator to know various stages of your loan.

➤ Evaluate your current situation accurately and see whether prepayment will benefit you or not.

➤ If you have other loans such as any home loan or education loan to deal with it is better to make a pre-payment and close Car Loan first as car loan does not fetch you any tax benefit along with high rate of interest.

Prepaying the outstanding car loan can prove to be a smart move financially if you are mindful of the pre-payment charges before you sign the car loan agreement. Check out Car Loan offer with Nil-Fore Closure and Pre-Payment Charges at Letzbank.


Main Category: Loans