Paying off a loan early feels like a smart move—it reduces interest burden and helps you become debt-free faster.
But depending on the loan type, the lender may charge a prepayment penalty.
This fee can sometimes reduce the benefit of early repayment, making it important to know when prepayment charges apply and how to avoid them.
Let’s break it down in simple terms.
⭐ What Is a Prepayment Penalty?
A prepayment penalty, also called foreclosure charge or pre-closure fee, is a fee that a bank or NBFC charges when a borrower:
Repays a loan before the full tenure
Makes part-payments beyond a certain limit
Forecloses the entire loan account ahead of schedule
Lenders impose this fee to compensate for the interest loss they face when borrowers close loans early.
⭐ Types of Prepayment
1. Part-Prepayment
You pay a portion of the outstanding principal early.
2. Foreclosure / Full Prepayment
You pay the entire remaining amount and close the loan before tenure.
Both may attract penalties depending on loan type and lender policy.
⭐ Which Loans Have Prepayment Penalties?
Not all loans have these charges.
🟢 1. Home Loans
Floating-rate home loans:
✔ No prepayment penalty as per RBI
Fixed-rate home loans:
❌ Banks MAY charge a penalty (usually 2%–4%)
🟢 2. Personal Loans
Charges typically 2%–5% of outstanding amount
Some lenders waive fees after 6–12 EMIs
🟢 3. Business Loans
Prepayment fee varies from 2%–6%
Flexi/overdraft-type loans often have no fee
🟢 4. Car Loans
Fixed-rate → penalty may apply
Floating-rate → usually no fee
🟢 5. Gold Loans
Most lenders do not charge penalties
Some charge minimal fees within the first 3 months
⭐ RBI Rules on Prepayment Penalty
✔ No prepayment penalty on floating rate loans (home loans, MSME loans)
RBI mandates that banks and NBFCs cannot charge penalties for:
Floating rate retail loans
Home loans
MSME floating-rate loans
✔ Fixed-rate loans can still have penalties
RBI allows lenders to decide charges for fixed-rate loans.
✔ No penalty when borrowers prepay using their own funds
Applicable mostly on home loans.
⭐ Typical Prepayment Charges (India)
| Loan Type | Prepayment Penalty |
|---|---|
| Floating Home Loan | 0% (No charges) |
| Fixed Home Loan | 2%–4% |
| Personal Loan | 2%–5% |
| Business Loan | 2%–6% |
| Car Loan | 2%–4% |
| Gold Loan | 0%–1% |
| Loan Against Property | 0%–4% depending on rate type |
⭐ Why Do Lenders Charge Prepayment Penalty?
To recover lost interest income
To prevent early exits that affect cash flow
To discourage borrowers from switching banks frequently
To maintain stability of loan portfolio
⭐ How Prepayment Penalty Is Calculated
If your outstanding loan amount is ₹2,00,000
Prepayment penalty = 4%
👉 Penalty = ₹2,00,000 × 4% = ₹8,000
This amount is added to your final payoff.
⭐ How to Avoid Prepayment Penalty
✔ Choose floating-rate loans
Floating-rate home & MSME loans have zero penalty.
✔ Check terms before signing loan agreement
Many borrowers miss this detail.
✔ Prepay after 6–12 EMIs
Some lenders waive fees after a minimum payment period.
✔ Negotiate charges
Especially for business loans or high-ticket loans.
✔ Use balance transfer wisely
Compare penalty vs interest savings.
⭐ Should You Prepay Even If Penalty Applies?
Prepay if:
Remaining tenure is long
Interest savings > penalty fee
You have stable emergency funds
Do NOT prepay if:
Tenure remaining is short
Penalty wipes out interest benefit
You are emptying emergency savings
❓ FAQs
1. What is a prepayment penalty?
A fee lenders charge when you repay a loan before the scheduled tenure.
2. Are prepayment penalties legal?
Yes, but not allowed for floating-rate home loans and MSME loans as per RBI.
3. Do personal loans have prepayment charges?
Yes, typically 2%–5%.
4. Should I close my loan early?
Yes, if interest saved is higher than penalty charged.
5. Does prepayment affect credit score?
It improves your score by reducing outstanding debt.
Published on : 22nd November
Published by : SMITA
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