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What is the prepayment penalty on a personal loan?
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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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A personal loan is a quick way to access the required funds without the need for providing any security or collateral. Whether it is funding a wedding, undertaking home renovation plans, covering medical expenses, or planning a vacation trip abroad, a personal loan comes in handy for meeting all non-speculative purposes and urgencies. The convenience of easy online application, quick loan approval, and structured personal loan repayment make it a popular choice among many.
However, before you hit on the personal loan apply online button to obtain a low personal loan interest rate and favourable conditions, ensure to factor in the concept of prepayment penalty too. A prepayment penalty in a personal loan, also addressed as a pre-closure fee, is a charge imposed by a lender when you choose to repay the loan outstanding before the specified repayment tenure. This charge serves to safeguard lenders against financial losses arising due to early loan repayments.
As per the RBI (Reserve Bank of India) guidelines, personal loans at a floating rate of interest are exempt from any prepayment charges. This means if you have availed a floating personal loan interest rate, then you can make early repayments without bearing any additional expense. However, for fixed personal loan interest rates, prepayment penalties may be applicable. Read on to understand the prepayment charges and foreclosure charges levied by Kotak Mahindra Bank.
Kotak offers personal loans at competitive fixed interest rates. As the bank offers a fixed personal loan interest rate, it levies certain charges on personal loan prepayment as per regulatory provisions and industry standards. For borrowers who took a Kotak personal loan before 1st February 2020, the choice of part prepayment is unavailable.
For Kotak personal loans disbursed post 1st February 2020, borrowers have the choice to make part-prepayment post-completion of a year of loan repayment tenure. This part-prepayment can be performed up to 20 per cent of the outstanding principal constituent and is allowed just once a financial year. Charge per instance of part prepayment is Rs 500 plus taxes. Foreclosure penalties are levied in case borrowers decide to completely close the personal loan before the completion of loan tenure.
Kotak personal loans foreclosure penalty follows a structured approach, catering to distinct stages of loan repayment tenure. For personal loans of up to three years, the foreclosure charge stands at 4 per cent + GST on outstanding principal constituents. Beyond the thre-year mark, the fee reduces to 2 per cent + GST on the outstanding principal constituent.
Notably, for loan proceeds exceeding Rs 10 lakh, a fixed foreclosure fee of Rs 999 plus applicable taxes is charged after the completion of the lock-in. Note that this is applicable just for sanction letters issued on or before 21st June 2023. Additionally, the foreclosure charge of Rs 999 can be availed if the loan closure is performed through the borrower’s own funds. The borrower requires providing a copy of the sanction letter or email it during the closure process. No net banking transfers are accepted for this purpose. Also, the borrower must provide the latest three-month salary statement and prove that no loan has been availed in the past three months.
Conclusion
The concept of prepayment charges plays a considerable role, especially in fixed-rate personal loans. By opting for a fixed-rate personal loan, you get the benefits of stability and predictability in interest rate movement, which is unlikely in the case of a floating-rate personal loan. So, before hitting on the personal loan apply option, ensure to check the prepayment charges, and include the same in your financial planning while using an online personal loan EMI calculator to understand your affordability.
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