How prepayment charges are calculated?

People tend to get loan products or services from the bank. COVID-19 has caused a situation of abnormality in society, for which the banks have been trying to convince their customers to close their accounts. The clients would also want to get rid of the responsibility of the loan. When everything seems so uncertain, both the bank and the customers would wish for financial security. Many banks try to check the purpose for which the loan was needed by the customer. Usually, for early payment, a prepayment charge is levied. But during COVID-19, there were some relaxations on this rule. The option of early payment only exists during emergencies. In general, the bank has this option where the borrower can close the loan before the deadline. If a considerable amount is paid as prepayment, then it leads to a reduction in the total loan amount and also the EMI. 

How can one calculate prepayment charges for a home loan?

Home loan is opted for by many people. Both employed and unemployed take this loan. Banks and NBFC, i.e., Non-Banking Financial Companies, both offer the facility of prepayment for a home loan. In this, one can repay a portion of the total amount. It helps to reduce the total due amount. When one decides to make the prepayment, then either the EMI can be diminished, and tenure can be kept the same, or the Emi can stay the same, and the term would get reduced. One can use an online calculator to check the details and also the prepayment charges. 

Some details are to be mentioned in the calculator to get the desired result. Those are discussed below:

1. The principal amount: The original amount that has been taken. It is the total amount that the lender gives to the client. 
2. The outstanding loan amount: The money one owes to the bank or the financial institution is known as the due loan amount. 
3. Remaining tenure: It refers to the total no. of EMIs that remains pending in the balance tenure. 
4. Part-payment amount: The portion of the amount due that one’s desires to pay off. There is a minimum amount required for this. The amount needs to be three times the amount of EMI. 

What is a home loan prepayment calculator? 

One can get many calculators online. They are offered by many 3rd party sources. The above-mentioned details would be needed by the website to calculate the result. Once the details are entered, the values or the result will be received in no time. 

Under what circumstances can the housing finance companies, i.e., HFCs, levy prepayment charges?

1. If an individual avails dual rate home loan: in this type of loan, the interest rate is a fixed one for starting years. Later a floating charge can be applied. Under this loan, a bank or financial agency can levy charges. 
2. The interest rate of a fixed home loan from a housing finance company, i.e., HFC: In case one borrows some amount from another bank or HFC for repaying the loan, then the HFCs can levy a prepayment charge. 
3. The interest rate of a fixed home loan from a bank: If someone opts for a home loan at a fixed rate of interest. The bank can levy prepayment charges depending on the agreement of the loan. 
4. Non-individual borrower: HFCs or the banks has the right to levy prepayment charges for non-individual borrowers. 

Under what circumstances can the housing loan finance companies, i.e., HFCs, not levy prepayment charges?

1. Dual-rate home loan that has a floating rate of interest: The dual-rate home loan gets shifted to a floating rate of interest. In that case, prepayment charges will not be levied. 
2. The prepayment gets made with one’s own money: If no money is borrowed from HFCs or banks and one uses their own money, then no charges are levied.
3. If an individual avails home loan with a floating rate of interest: Home loan with floating rate of interest the lender cannot levy prepayment charges. This has been stated by RBI. 

What are the other kinds of loans in which prepayment is allowed?

1. One can avail of the facility of prepayment for a business loan. 
2. An education loan is another loan that has the facility of prepayment.
3. A person can also opt for the option of prepayment if they have taken a personal loan.
4. Many other loans have this option of prepayment.

What are some of the tips for calculating prepayment charges?

1. It is always advised to go through the fine print thoroughly. It should be made clear what methodology is used by the lender to determine the prepayment charges. Depending on the interest rate, a fixed amount is usually levied. 
2. The appropriate principle needs to be determined. One must ask for the amortization table from the lender. It would help them to have an exact break-up of the payments. 
3. The lender can charge prepayment charges depending on the differential rate of interest method. One can calculate this by finding out the difference between the initial rate of interest and the new one. 
4. Calculating the charges manually can be difficult, and hence one can use an online calculator.

Conclusion 

Prepayment helps the borrower. This helps to either reduce the EMI or the tenure of the loan. This reduces the financial pressure on the person lending the money. But some banks or HFCs can levy prepayment charges. It is advised to check all the details of how the lender will charge this penalty before they opt for this option. If a person needs a financial chance, then “Piramal Finance” is a good personal loan/financing option for buyers.