Penalties for early repayment: A double-edged sword.

(Baonghean) - Recently, public opinion has reflected on many issues regarding banks imposing prepayment penalties when customers settle their accounts before the due date. The banks argue that customers have breached the contract, so this fee is a reasonable amount to compensate for costs incurred in the capital mobilization process…

Ms. Nguyen Thi Bich, a customer residing on Phong Dinh Cang Street (Vinh City), needed to borrow nearly 1 billion VND to build a house. Knowing that the Vietnam Prosperity Bank branch in Vinh City was offering a preferential loan package with a 5% interest rate for individual customers with collateral for car purchases, real estate, business, and consumer loans, she went to inquire. There, the bank's credit officer advised her that if she borrowed for 5 years, she should opt for the Platinum preferential package, with an interest rate of only 5% per year for the first 12 months. However, the interest rate after that would be calculated according to market rates (currently around 12% per year). Being cautious and having heard about prepayment penalties, she inquired about the penalty fee if she could find a way to repay the loan early. The loan officer explained that if she settled the loan after two years, she would have to pay back the difference due to the preferential interest rate. Specifically, the current market interest rate is 12% minus the preferential rate of 5%/year, leaving 7%/year. This is multiplied by the total loan amount multiplied by 24 months and divided by 12. Therefore, if she borrowed 700 million VND, the penalty would be 0.07 x 700,000,000 x 24:12 = 98,000,000 VND. In total, besides the interest payable according to the contract, she would also have to pay a penalty of 98 million VND.

Transactions at Agribank Vinh City Branch. Photo: Quynh Lan

With the interest rate offered, along with the penalty fee, Ms. Bich believes it's too high given the current low interest rates. Ms. Bich isn't alone; many customers, especially individual customers, have been shocked by the excessively high prepayment fees charged by some banks. Upon investigation, it was found that each bank charges a different fee. For example, at Techcombank's Nghe An branch, consumer loans have an interest rate of 8% per annum for the first three months, but the penalty fee is lower; if a customer repays early, the penalty fee is 2% of the total amount repaid. A common point among banks is that they don't allow customers to review the contract terms upon request, only before signing the official agreement. Conversely, some state-owned banks don't charge fees, even one day after signing the contract; they even encourage early repayment. Their explanation is that the most important aspect of lending is control before, during, and after disbursement. The loan process for customers sometimes encounters problems, with the funds being misused. Therefore, if customers have the money to repay the loan, even if it's not in accordance with the contract, they will not be charged any fees. A representative from Agribank's Nghe An branch stated: "We calculate interest based on the actual outstanding balance from the date of disbursement; we do not charge any fees."

To ensure capital safety, in principle, loans are disbursed according to the agreed-upon term, and according to common practice, charging a prepayment fee is normal. For medium and long-term loans, banks have higher deposit requirements and incur more costs (higher deposit interest rates, asset holding fees, mandatory reserves, etc.). Prepayment would affect the bank's capital structure. Therefore, according to the regulations on lending by credit institutions to customers issued under Decision No. 1627/2001/QD-NHNN dated December 31, 2001, and Circular No. 05/2011/TT-NHNN dated March 10, 2011, credit institutions and customers may agree on the prepayment fee in case the customer repays the loan early. Directive No. 01/CT-NHNN dated January 15, 2014, the State Bank of Vietnam instructed credit institutions to consider applying reasonable fee levels for fees collected in accordance with the law; and to refrain from collecting fees related to loans, except for those stipulated in Circular 05.

Mr. Nguyen Sy Minh, Chief Accountant of SHB Bank's Nghe An branch, stated: "The early repayment fee is a penalty for breach of credit contracts by borrowers to compensate for the interest costs incurred by credit institutions while they arrange to lend this money to other customers. This practice is not against the law. Therefore, the early repayment penalty is appropriate because when lending to customers, credit institutions have already balanced the mobilized capital in terms of both interest rates and terms to meet the requirements of the loan… “In our bank, if a customer borrows working capital for production, we do not apply the penalty and may allow early repayment; or in cases where early repayment is for the purpose of taking out a new loan. Or in cases where a customer borrows for 5 years but the loan period exceeds ¾ of the contract term, we do not apply the fee…,” Mr. Minh added.

Regarding this issue, Mr. Phung Ba Ngoc, Director of Toyota Vinh Joint Stock Company, stated: Typically, when granting loans, banks do not allow customers to settle the contract within the first year. If a customer needs to settle the contract early, both parties must reach a separate agreement. However, many cases result in high early repayment fees due to insufficient negotiation before signing the contract. Therefore, it is necessary to carefully read and agree on terms before signing, because in reality, customers often don't read the terms carefully to get the deal done; and many contracts do not clearly state the fee structure.

The reality is that for quite some time, banks have been mobilizing funds exceeding the ceiling with high interest rates. Now, with excess capital and a challenging period for credit growth (in the first nine months of the year, average credit growth in Nghe An province reached 8.6%), the pressure to increase credit growth and profits, coupled with surplus funds, has led banks to raise penalty fees. However, prepayment penalties are a double-edged sword in the current difficult situation. Building a brand is already difficult; if excessively high fees are imposed, banks will damage their image, attracting customers only once and preventing them from returning. This is a significant loss that banks need to consider carefully, avoiding the temptation to be greedy and lose everything.

Thu Huyen