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Sunday, Dec 29, 2002

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Prepay your bank loan and pay dearly for it

N.S. Vageesh

CHENNAI, Dec. 26

WHEN you see the legend `No prepayment penalty' on a bank hoarding, you may think somebody is playing a prank. Who's prepaying these days? After all banks have hitherto only been complaining about delayed payments. Do a double take and you notice the line is one of the selling propositions for the housing loan scheme that the bank is offering.

Till about a year ago, if you did want to prepay a loan or repay a higher amount, because you came by a windfall, the bank or housing finance company would often charge a prepayment penalty of two per cent of the amount prepaid. Competition has now forced lenders to waive this charge.

But wait a minute. There is a catch. The bank has its own interpretation as to what prepayment or premature closure means for the purpose of levying this penalty. The penalty will not apply only if you, the borrower, issue a draft or a cheque from your own account to settle the balance. (It begs asking that if you had such a big amount in your bank account, why would you need the loan in the first place?)

But if you have negotiated with another company or bank to take over the housing loan because of a cheaper rate, and they issue the cheque/draft, the lending banks immediately throw the rulebook at you and the penalty will be applied. And as some instances show, the rules themselves seem to ferment suddenly and are sprung up on unsuspecting borrowers. In one such instance, a Delhi-based housing loan borrower Mr G. Krishna Moorthy, 42, an executive with the National Thermal Power Corporation (NTPC), found himself slapped with a two per cent prepayment penalty by State Bank of India (that worked out to Rs 17,000).

Mr Moorthy had taken a 15-year, Rs 9 lakh loan on a floating rate interest of 13 per cent from SBI in December 2000, for buying his 900 sq. feet, two-bedroom 2nd floor apartment at Sukhdev Vihar, in South Delhi. When during the course of the next 20 months, he found interest rates dropping to historic lows he hoped that he would benefit substantially (since he had taken a floating rate loan.) Although SBI did drop rates a bit (12.5 per cent), it did not pass on fully the benefit of lower rates. (Newer borrowers were getting the loans at 10.5 per cent.) So, Mr Moorthy moved his loan to Corporation Bank, when it offered to take over his loan for around 10 per cent in November 2002. That was when he got this parting "penalty" kick from SBI.

SBI was at that point of time advertising in various newspapers that there was "no prepayment penalty" and claimed without a trace of irony, that there was "no fine print" in the advertisements.

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