Know more about prepayment of a home loan!
15 May 2019
If you are looking to reduce your debt burden, you should consider prepayment of home loan. As soon as your finances improve, you can choose to finish your home loan, either in part or in full. If you repay your home loan completely or in part before the scheduled tenure, it is called prepayment of home loan.
While most banks allow for a prepayment of home loan, some banks may charge a small fee for pre closure. It is, therefore, advisable to consider all the pros and cons of foreclosure before taking the plunge.
Who is eligible for a prepayment of home loan?
All home loan borrowers are eligible for pre closure, as long as their bank offers this facility. You can ensure that you have the option of prepayment of home loan at the time of taking the loan.
Most banks do not encourage prepayment as it causes a loss to them. When you decide to pay off a loan ahead of schedule, banks incur additional costs for rerouting the funds through credit channel. Therefore, banks may impose a fine for preclosing your loan.
That said, you are well within your rights to foreclose your loan—in part or full—if it gives you long-term benefit. If, even after paying the fine, you are saving on the interest you pay every month, it is worth foreclosing the loan.
How to do prepayment of home loan?
There are many ways in which you can prepay your home loan. You can either go all out and completely repay the loan ahead of schedule or you can pay off a part of your debt. You can also work on a combination of the two.
- Start small, go up gradually: One way of prepaying your home loan is starting with a small prepayment in the beginning of the loan and to increase this amount every year at a constant rate. You can do so by saving through the year and spending your savings on prepayment.
- Fixed prepayment: You can do this by prepaying a fixed amount towards your principal every year. This you have to do over and above your EMI payments. Plan your expenses through the year and make a fixed saving every year. Spend this saving on prepayment to reduce principal.
- Higher EMI: Another way of reducing your principal is by paying more than your calculated EMI. Every month make a payment that is slightly higher than your EMI. This goes a long way in reducing your debt burden.
- Full repayment: If your finances have improved tremendously or if you have been able to mobilise a large sum of money, you can completely pay off your loan ahead of your tenure. You may, however, have to pay a fine for full prepayment of home loan.
Home loan prepayment rules
The Reserve Bank of India (RBI), from time to time, revises the rules it has set for “Levy of foreclosure charges/ pre-payment penalty on Floating Rate Loans”. It specifies the conditions in which banks and housing finance corporations (HFCs) can charge prepayment charges.
- When are banks and HFCs allowed to charge prepayment fees:
- Home Loan is taken by non-individuals: When a company or firm borrows funds in the form of housing loan, it is not exempt from foreclosure charges.
- Fixed-Rate Home Loan: If you have taken a fixed rate home loan, you will be levied a foreclosure charge for prepayment of home loan. A fixed-rate loan is when the rate of interest is the same throughout the loan tenure. Both banks and HFCs are allowed to levy a penalty on foreclosure of home loan. HFCs, however, can charge a penalty only if you are repaying the loan by borrowing from another bank or HFC. HFCs cannot charge any prepayment penalty if you prepay the loan with your own funds.
- Dual rate home loans: Banks are allowed to charge a penalty for foreclosing a dual rate home loan, which is a combination of fixed rate and floating rate of interest. In such cases, the interest rate is fixed for the first few years and then becomes variable.
- When are banks and HFCs not allowed to charge prepayment fees:
- Floating rate home loan for individuals: Home loan prepayment rules state that prepayment charges or penalties are not levied on borrowers for taking a floating rate home loan. No extra charge is levied on either part or full payment of the loan.
- Paying fixed rate home loan from HFCs with own funds: HFCs can not charge prepayment penalty on fixed rate home loan if the individual is repaying with his/ her own funds.
- Dual rate home loan: Both banks and HFCs cannot charge a penalty if the borrower prepays the loan after it has shifted to variable rate scheme and has become a floating rate loan.
Prepayment of home loan may not always be the right decision. Only if the long-term benefits surpass the penalty to be paid, should you consider prepaying your loan. If you plan your prepayment well, you may be able to save a lot on interests.
How to remove car loan hypothecation after car loan repayment?
A secured loan is a loan in which an asset is hypothecated to the lender. Since the lender finances the purchase of the asset, the original purchase papers of the asset are with the lender. When it comes to purchase of a home, the asset’s ownership shifts to the borrower once he has completely repaid the loan. In gold loans, the gold is left under lock and key with the lender. Once the loan is repaid, this gold is given back to the borrower. However, it is not the same when it comes to a car loan.
In a car loan, the car purchased is hypothecated to the lender. The lender pays the funds to purchase the car. However, a car also has to be registered with the Regional Transport Office (RTO) before it can be driven on the road. In such a case, the name of the lender appears on the registration certificate (RC) of the vehicle/ in the records of Regional Transport Office. This means you need to take a few additional steps once the car loan is repaid for car loan hypothecation removal. Once the car loan hypothecation is removed and the car’s ownership is completely in your name, then you will have a clear title and ownership to your car. This is especially important while getting insurance. In case anything happens to the car, the Insurance claim will go to the owner of the car, which in case of hypothecation, will be in favor of the lender.
This is why car loan hypothecation removal is important.
How to remove hypothecation from RC after car loan repayment/termination:
Step 1: Repayment of car loan
In the hypothecation agreement of car loan, the name of the lender appears as the owner for the car. To start the procedure for removal of the lender’s name, you need to repay the car loan completely. The loan must be paid off and a nil balance must appear in the lender’s books.
If you are planning to prepay your car loan, it is better to inquire with the lender about their prepayment charges and conditions. Sometimes lenders have prepayment charges on these loans and this can go up to 2%.
Once you’ve completely paid off the loan, you need a no dues certificate from the lender. This certificate will state that you have completely discharged the dues to the lender.
Step 2: Collection of documents from the lender
Once the loan is repaid, the lender will give you the no dues certificate. Along with this, you need to collect:
No objection certificate:
This certificate states that the lender does not have any objection with car loan hypothecation removal. One important point to remember is that you must take multiple copies of the No Objection certificate. This No Objection certificate will need to be submitted to the RTO and to the Insurance company. You will also need one copy for your own records. Usually, the no objection certificate is valid for 3 months. So, you must approach the RTO immediately after you get the no objection certificate.
This form is a notice of termination of hypothecation. This form also has to be made in triplicate or in 3 copies. Each state usually has its own format for this form which can easily be found online or at the RTO.
Step 2: Submission of documents to the RTO
Once you have the documents from the lender, you need to visit the Regional Transport Office or the RTO with a set of documents that includes:
Original form 35 signed and stamped by the borrower and bank
Original Bank No Objection Certificate
Attested copy of PAN
Attested copy of insurance policy of car
Original Registration Certificate
Copy of Pollution Under Control (PUC) certificate
These documents will have to be submitted to the RTO. If your address does not match the address in the registration certificate, you will need to submit Form 33 which is for change of address.
Once you submit these documents to the concerned officer at the RTO, they will get them verified. You need to pay the respective fees to get the process completed. The officer will give you a time and date on which you can collect your updated Registration Certificate (RC)
Step 3: Collect your updated Registration Certificate
The date and time for the visit will be specified when the documents are submitted. When you visit the RTO on the specified date, you will get the updated RC. If there are any mistakes in the details, you can get them corrected and collect the RC on a future date. Once you collect your updated RC, you will have completed all car loan hypothecation removal formalities.
The 3 Easy Steps to Calculate EMI on Personal Loan?
A personal loan does not require the borrower to provide collateral and so it is an unsecured loan. Since these are unsecured loans, the rate of interest on these loans are believed to be quite higher than all other types of loans. The purpose or intention of a personal loan is to fund immediate financial contingencies. It could either be for business capital, marriage, education or even foreign trips, though the end use of the loan really depends on the borrower, as long as it is for a legitimate financial need.
Before you apply for a Personal Loan, you may want to get down to the basics, to shop for the best offers on personal loans in the market. Among the most popular ones is the Bank of Baroda’s Personal loan product which apart from having the pedigree of belonging to one of the oldest and largest Indian banks, comes replete with some amazing features like flexible repayment options, affordable EMIs (Equated Monthly Instalments) that sit easy on your pocket and sizable loan amount among others in the category of personal loans.
Calculating the EMI on personal loans
The EMI calculations mainly rely on three variables- the loan term or the tenure of the loan, the loan value and the rate of interest. The rate of interest is one of the aspects that comes determined by the bank.
Calculating using the PMT formula
This is a longer, tedious and round about approach to calculating the EMI on your personal loan. Here, you can run the PMT formula on Microsoft Excel to calculate the EMI, where
PMT is your EMI,
NPER or number of periods is the total number of payments for the loan
PV is the loan value or the principal
Rate is the rate of interest/12
The formula is
PMT (Rate, NPER, pv).
You can keep trying the formula for various combinations and then choose the one with the lowest EMI, though this is a roundabout approach that could be prone to human error.
Online EMI Calculator
Or a far easier option to calculate the affordable EMI, is using, for example, Bank of Baroda’s online personal loan EMI calculator.
Here, you will find a slider on the range of each of the three basic variables on your screen- the loan amount you are likely to need, the tenure or the repayment period of the loan that suits your finances and the rate of interest.
Now, the rate of interest is what you get from the bank, while the other two aspects, i.e., the loan amount and the tenure of the loan are the ones you can play around with here.
When you place the cursor on a particular value of the loan term, rate of interest and loan amount, the calculator throws up a monthly payment value, which is your EMI. You can move the cursor horizontally along the range provided to pick the various values.
Here’s why using a Bank of Baroda personal loan EMI calculator works.
If EMI is too high
You can pick a longer loan term or
You can make the loan amount smaller.
If you find the EMI is affordable or even lower than ideal then you can plan to repay faster by either
Taking a larger loan value or
A shorter loan term.