Early Payoff Penalty Calculator
Prepayment Feasibility Analysis:
- Future interest you would pay if you carry the loan: ₹38,929.
- One-time bank foreclosure charges: ₹9,000 (at 3% rate).
- Statutory 18% GST charged on processing fee: ₹1,620.
- Total closure charge (Penalty + GST): ₹10,620.
- Net absolute savings by pre-closing early: ₹28,309.
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Loan Pre-closure Net Savings Formula
Weighs the future interest saved by prepaying a loan against the penalty charges applied by the bank.
Worked Example: Pre-closing a loan with ₹3 Lakhs outstanding at 12% with 2 years left (3% foreclosure fee)
Loan Pre-closure: Balancing foreclosure penalties against interest savings
Anil had a personal loan outstanding of ₹3 Lakhs at 12% interest with 2 years left. He had surplus cash and wanted to pre-close the loan. The bank charged a 3% foreclosure fee on the outstanding principal.
Anil calculated that prepaying would cost him a foreclosure fee + GST of ₹10,620. However, the interest saved by prepaying was ₹39,120. Pre-closing the loan saved him a net ₹28,500, making it a smart financial decision.
Foreclosure charges are fees applied by lenders to recover lost interest income when you repay a loan early. Prepayment GST is also charged on the fee.
Compare the total interest you will save over the remaining loan term with the foreclosure penalty. Prepay only when the net savings are positive.
Frequently Asked Questions
What is a loan early payoff penalty?
It is a foreclosure fee charged by lenders (usually 2-4% of the outstanding principal) to recover the interest income they lose when you repay a loan early.
Is prepaying a loan always a good idea?
Yes, in most cases. If the interest rate is high and you are early in the tenure, the future interest saved will heavily outweigh the bank's one-time foreclosure fee.
Are there foreclosure charges on home loans?
As per RBI rules, banks cannot charge foreclosure or prepayment fees on floating-rate home loans, personal loans, or retail loans taken by individual borrowers.
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