Most banks and lenders refrain from letting you prepay or pre-close your personal loans. This means that you may not be able to close your loan account ahead of the tenure or pay a lumpsum amount to bring your outstanding down even if you have the fuds to do so. Any such transaction may invite a penalty.
HDFC Bank, however, is different. If you have taken a personal loan from HDFC Bank, the bank will allow you to make prepayment or pre-closure ahead of the tenure. The bank has a lock in period of one year within which you can neither pre-close your account nor make prepayments. After the 12 month period you are free to do with your loan as you deem fit according to your income.
HDFC Personal Loan Preclosure Charges
There are nominal charges that the bank levies for prepaying or preclosing your personal loan. As discussed above the bank does not allow any prepayment or pre-closure within one year of the first EMI. Only part payment is allowed after that. Thereafter, the bank levies a fees for such transactions.
The bank allows a part payment of up to 25 per cent of the principal outstanding. This is allowed only once in a financial year and twice during the entire loan tenure. For salaried individuals, the prepayment charge is 4 per cent of the outstanding if the prepayment is done between 13th and 24th month since the first EMI. If the payment is made between 25th and 36th month, the prepayment charge is 3 per cent of the principal outstanding. Payments made after the 36th month will be charged at 2 per cent of the principal amount.
Documents required for pre-closure of HDFC Personal Loan
At the time of making a prepayment or pre-closure of a personal loan, you need to submit a set of documents to complete the formalities. Documents include a proof of income, identification and residence.
You can submit a copy of your passport, driving licence, or Aadhar Card as a proof of your residence and identity. Additionally you can submit sale deeds, house registration certificate and utility bills as residence proof. You will need to submit copies of bank statements that shows that your EMI has been paid regularly.
Step-by-Step Process of Pre-closing HDFC Bank Personal Loan
HDFC Bank does not usually allow complete pre-closure of a personal loan. It does, however, allow you to make part payment towards your loan. This has to be done at least 12 months after the first EMI and should not exceed 25 per cent of the total principal outstanding. Part payment is allowed only twice in the entire loan tenure.
Here are the steps you need to follow to pre-close a personal loan:
-First, reach out to a representative from HDFC Bank and inform them of your plan to prepay or preclose a personal loan with HDFC.
-The representative will guide you through the process of prepayment.
-You can make the payment through cash, cheque or demand draft. These can be dropped off at any branch of HDFC Bank.
-If you intend to pay over Rs49,000, then it is advisable to make the payment via pay order or account payee cheque or demand draft. HDFC Bank does not take cash over Rs49,000 for the payment of personal loan.
-You also need to pay the HDFC Personal Loan Prepayment Charges and the HDFC Personal Loan Preclosure Charges.
Benefits of Pre-closing HDFC Bank Personal Loan
The idea behind allowing customers to make prepayments is that it gives the customer flexibility to pay the loan as their income increases. Banks usually charge a prepayment fees of 2 to 4 per cent of the outstanding amount. HDFC Personal Loan Preclosure Charges also fall in this range.
So if you make the prepayment and your outstanding amount reduces considerably, you may have to pay lower EMIs going forward. This benefit should be weighed against the prepayment fees. You can sometimes negotiate the prepayment charges. If you have decided to prepay your loan, you should ask for your revised amortisation schedule. See the benefits in your upcoming EMIs.
What is the difference between prepayment and pre-closure?
In case of prepayment, you pay off a considerable chunk of your outstanding amount in one go. This reduces your outstanding amount and your future EMIs are likely to be lower. You can opt for this option as and when your income allows you to pay off a big part of your debt. Banks do charge a fee for making prepayments, so make sure the overall benefit you receive is higher than the fee.
Pre-closure, on the other hand, means closing a loan account ahead of the loan tenure. As the name suggests, it means that you pay off your entire debt in one go. Let’s take this example: You took a personal loan worth Rs10 lakh two years ago. Your loan tenure is five years. In the two years since you took the loan your income has increased significantly. You have managed to save a large sum that you want to pay towards the loan to close it. You can do so after paying a small fee for making a pre-closure of your loan.
Most banks and financial institutions have a lock-in period in place where they refrain from any prepayment or pre-closure. Once you have crossed the lock in period, you can pay the required fee and either pre-close or prepay your loan.
Does it make more sense to pay the loan through the tenure or making a prepayment or pre-closure?
Paying a loan through its tenure or making a prepayment on pre-closure are the options available to you when you take a personal loan. You can choose to repay in any of these ways. The decision is ultimately yours.
What works best for you depends on what your requirements are and what your financial situation is. If you have a fixed income that is growing steadily, you can choose to repay the loan till the end of the tenure. If your financial condition improves and you have a significant amount available at your disposal, you can pay off your loan partly or entirely. This will reduce the burden of your EMIs in the future as the outstanding principal decreases. You can also pre-close the loan if you have the funds.
The benefits of your decision should trump the prepayment or pre-closure charges that you have to pay to the bank. In terms of credit score, making prepayments or opting for pre-closure does improve your credit score. At the same time there are no adverse effects on your credit score if you don’t opt for these options. A longer credit history also improves your credit score.