No Penalty for Pre-Paying Floating Rate Term Loans to individuals.

Now you can pre-pay your housing loans, vehicle loans or / personal loans without having to worry about what your bank might charge you as penalty.

The RBI (Reserve Bank of India) has directed banks to not levy any penalty on individual borrowers pre-paying floating rate term loans.

“It is advised that banks will not be permitted to charge foreclosure charges/pre-payment penalties on all floating rate term loans sanctioned to individual borrowers, with immediate effect,” the RBI said in a statement.

Bank Customers tend to prepay (foreclose) their loans when they find that interest rates on their term loans have risen. Some customers foreclose their loans by switching to banks that offer loans at lower rates.

Some banks charge as much as 2% of the outstanding amount as penalty for foreclosure.

The RBI had earlier said that banks can not discriminate between a new and an old customer by offering the 2 different interest rates.

This is a consumer friendly move, said Mr. V. Kannan, Chairman and Managing Director, Vijaya Bank pointed out that banks faced the prospect of losing customers due to the levy of pre-payment penalties.

“Suppose a bank charges a customer a pre-payment penalty of 0.10% or 0.15% (of the outstanding housing loan) then is it ready to lose a customer who has been with it for 10 years? The customer is not going to just close the housing loan but his entire banking relationship,” Kannan pointed out. 

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