AXIS Bank Car Loan

(Prepaying Car Loans in India: When is the right time?)

When do I pre-close my existing car loan? What would be the right time? The answer to this question that lingers in every borrower’s mind is - ‘The sooner the better’. There is no ‘good’ or ‘right’ time to close your car loan. Wrap up all your pending car loan liabilities when your get your finances right. As simple as that. Prepaying your car loan before the stipulated tenure always helps save some amount of money that you will be paying to the bank as interest rates and other charges. Additionally, car loans in India do not offer the advantage of tax deductions and benefits for borrowers, so closing the loan when you have the required funds is the wisest thing to do. There are calculator tools available on the internet which actually help you gauge how much money you would be saving if you prepay your car loan. Banks in India lure in customers with attractive interest rates and waivers on processing fees but hidden under these compelling offers are prepayment charges which borrowers are oblivious to at the time of application.

With borrowers deciding to be wise about their funds and loans, banks have gotten wiser. Completely aware of the smart customer, banks in India levy high prepayment charges expecting most of their customers to prepay their car loans. Since a car loan does not offer any sort of benefit to a customer and is mainly a liability on his head, Indian borrowers tend to close their car loans mostly in the early stages of the loan tenure. The earlier one pays his outstanding car loan, the earlier he gets out of the cycle of interest rates and charges. Banks impose high prepayment charges if the car loan is closed early and lower the rates if the customers chooses to prepay his loan in the finishing stages of his loan tenure. What a customer thinks he saves as prepayment charges for early closures, he will end up paying as extra interest rate to the bank.

Prepayment Charges in Banks

In India, despite the RBI mandate, private sector banks still charge huge amounts of prepayment charges on customers, while all the public sector banks have done away with these type of charges. Nationalized banks like Bank of Baroda, Corporation Bank, Dena Bank, State Bank of India and Union Bank of India impose zero pre-penalty charges on customers, irrespective of when they close their car loans. Though interest rates amongst these banks are on a similar range, private sector banks have high variable prepayment charges. Banks levy a percentage of the outstanding loan amount as prepayment charges, depending on whether the car loan is closed within six months, a year, two years or later. Prepayment charges on Axis bank car loan are as high as 10% for closures in the first six months of the loan tenure, 5% after six months and zero percent after 24 months of the car loan tenure. Banks like ICICI, HDFC and IDBI charge an amount below 5% of the outstanding principal. Customers also have the option of paying the interest rates due for the unexpired period of the car loan when they borrow from certain banks.

As a word of advice, customers taking a car loan and intending to prematurely close their loans should have the know-how of fees and charges levied by banks and avoid getting caught in the scheme of things.