|Based upon requirement of an individual loans can be classified into various categories. Loans can be differentiated into educational loans, home loans, vehicle loans, personal loans, gold loans et al, catering to the various needs of a person at different times while acquiring an asset. Interest rates on loans can also be differentiated into fixed interest rates or floating rates. But there is one thing which comes tagged along with all loans and that happens to be the ‘terms and conditions' or the contract of the loan. Terms and conditions safeguard the interests of both the borrower as well as the lender.
The terms and conditions of a loan cover all the aspects related to the loan, right from applying for the loan to margin amount, loan tenure, moratorium period, penalties, surcharges, documentation and many more. But one of the major clauses in most loans is the 'prepayment' clause. Prepayment means repayment of a loan by the borrower before the stipulated time in the loan contract.
What is Prepayment
Prepayment as the word suggests refers to repayment of a loan before its stipulated tenure. Prepayment of loan involves simply contributing an extra sum towards EMIs. This extra amount reduces the overall tenure of the loan, which also reduces the total interest paid and hence total amount paid to the bank is reduced.
Banks generally discourage borrowers to prepay fixed rate loans because in case of prepayment/foreclosure, the borrower ends up paying lesser to the lender than it would have been under the full tenure of the loan. The lender generally charges a penalty on early closure of such loans.