Prepayment charges: The Price to be paid for Home Loan Portability
Consumers who are first time loan borrowers are often baffled by the idea that prepayment of their loan amounts can cost them quite a lot! However, the condition of chargeable prepayment has its own economic rationale in place and you must be aware of its nitty-gritties before heading towards borrowing. Lending institutions themselves borrow from the market to lend to its consumers. This makes them bound by contract to continue paying the rate of interest that was decided upon at first. This contract cannot be altered in case you prepay your loan amount before the repayment tenure. The home loan prepayment charges levied by the bank or a Non-Banking Finance Company helps in reimbursing the costs incurred by the lender. Such costs are incurred because there could be a delay between the time they receive money from you as a repaying consumer and lend it to a new borrower. Chances of the money being re-lent at a lower rate of interest is also taken into account.
Other reasons for prepayment charges
Lenders invite a lot of upfront costs on borrowing from the market and lending consumers. These costs are way higher than what the lending institutions charge you. They do so in the hope to cover those over the tenure of the loan by means of the rate of interest you pay. Prepayment of loans, therefore, interfere with their process of recovering the costs. Prepayment charges have been allowed by most regulators including the Reserve Bank of India which regulates all banks.
The NBFC advantage over banks
Not only regulators but also courts or the Competition Commission of India have approved of the practice of levying prepayment charges on consumers. However, the National Housing Bank, the bureau regulating the Housing Finance Companies, in 2010, issued a notice which forbids this practice. However, it must be understood that prepayment charges, under this notice, is only disallowed in case the consumer pays off the loan using his own resources. These resources could include any kind of informal means of acquiring money such as selling of jewelry or land, bonuses, salary arrears and so on.
Why prepayment charges is an important issue
It is necessary as a consumer to have adequate knowledge about home loan prepayment charges in relation to portability so that you are able to identify cases of unfair floating rates. Not only do these lenders charge exorbitant floating rates but a shift fee is also charged for bank portability. Lenders often tend to create non-tariff barriers from shifting loans to new lenders. They do so by employing non-cooperative means such as holding of security documents integral for the process of transfer. It is necessary, therefore, to put some regulations in place with reference to bank loan portability.