Pre-payment penalty

But in case you are paying a penalty for part prepayment then ensure that the charge is not more than the interest saved for the period. Once you decide to make a part prepayment, you can pay an amount after a certain period and thereby bring down the principal. This will reduce your loan outstanding and help you to save the net interest that will drop down with every pre-payment you make.

Principally the interest paid is more if the loan tenure is long so if one makes pre-payment, the repayment period declines and therefore the net interest falls. It is always better to repay your loans in the shortest possible tenure and reduce your interest liability, provided it can be managed comfortably within your income. The net interest that is saved by prepaying the loan is a major factor that prompts one to opt for pre-payment.

Banks normally cap the maximum EMI at 50% of the income but part pre-payment can be made through your additional earning like profits from the stock market, maturing of old investments, increase in salary or a bonus.

Meanwhile make sure the pre-payment penalty that you are paying during the process is not more than the interest saved by you. Often customers sign into a loan agreement that does not mention the prepayment penalty and are not aware of what the actual prepayment charges are. So while entering into loan contract with the bank, one should note the prepayment penalty. The penalty can also be negotiated if you have a good credit history. In fact for some customers, the bank can even waive off this charge.