Wednesday, February 3, 2010

Prepayment Penalty on Loans

Banks not ready to withdraw prepayment penalty

CCI sent notices to banks and other financial institutions asking clarifications about why they charge penalty from the customer when he wants to foreclose it. Banks justified saying otherwise people will switch banks very frequently and it will result in higher lending risks.

I think this reasoning and this charge is absolutely insane. If a customer is prepaying the loaned amount either by its own pocket or by transferring the loan to another bank, it means it is paying you all back the entire principal and has already paid you all the interest for the time it has used your money. Now onwards, there is no risk that this customer will default. Plus, bank now can again lend this money to someone else and start earning interest again.

All banks try to give teasers rate to lure new customers but never care for existing customers. This policy is one of the tools that assist them in same. Prepayment penalty should be withdrawn completely so that old customers are also taken care of as well as banks/financial institutions want to lure new customers.

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