Personal loans are one of the simplest ways to access funds in a short period of time in India. But they also come with one major drawback – they come with expensive interest rates compared to secured loans. That’s why many borrowers seek ways of closing out their loan early through loan prepayment or foreclosure in the hopes of saving money on interest.

However, most people don’t really know how prepayment works, how much they can save, or the charges involved. Some even assume that all early payments are good pay, which is not the case.

In this guide, we’ll discuss in detail everything you must know on personal loans prepayments, foreclosures like rules, charges, benefits, savings tips and how to know the right time to prepay. If you are planning to repay your loan early then this will help you make a smarter decision.

What Does Prepayment of personal loan mean?

Prepayment is a payment that you make by pre-paying a part of your outstanding personal loan before you are supposed to pay it, on the scheduled EMI date. There are two types:

Part-Payment /Partial Prepayment

You pay some of the outstanding amount of money that is principal. Example: ₹50,000 against a ₹2,00,000 loan.

Pre Full Prepayment / Foreclosure

You pay the entire balance of the remaining loan at one time and you close the loan completely.

Both methods have benefits in reduced interest costs but the strategy is different depending on when and how much you pay.

How does Prepayment save your Loan Cost?

Personal loans follow reducing balance method that is:

• In the first months, EMI covers mostly interest
• In subsequent months, EMI covers more principal

This means that the sooner you are able to prepay, the more interest you save.

Example:

If you make a ₹3,00,00, 14% interest loan for 48 months: .

• In the first year alone almost 50-60% of your EMI goes towards interest.
• A prepayment in the 6th month saves much more in interest than one in the 30th month.

Therefore, timing is important when it comes to prepayment.

Persons Loan Prepayment Rules in India

Different lenders have different policies, but general rules for the industry are:

Prepayment Only Allowed After Minimum Lock-in Period

Most lenders will allow for prepayment only after:

• 6 months, or
• 12 EMIs (depending on policy of the lender.)

Digital lenders may make it possible to pay off your loans sooner but may have higher foreclosure fees.

Prepayment Charges Apply

Foreclosure or Part Payment charges typically are in the range of:

• 2% to 5% of the outstanding principals
• Plus 18% GST on the charge

For example:

 Outstanding amount = ₹1,00,000

 Foreclosure charge @ 4% = ₹4,000

 GST @ 18% = ₹720

 Total = ₹4,720

Fixed-Rate Loans So May Charge A Prepayment Fee

Most personal loans are of fixed rate. RBI guidelines permit lenders for foreclosure charges to be charged on fixed rate loans (but not on floating rate loans).

Floating Rate Personal Loans Zero Foreclosure Charges

In case you have a floating rate loan (personal loans can hardly have this):

• No prepayment charges
• You can repay anytime

Business Loans and Credit Line Have Different Rules

These may have flexible repayment and also lower fees depending on the lender.

Why Prepayment & Foreclosure Penalties Are Charged by the Lender

Lenders charge these fees to reimburse the fee for:

• Divisions in future interest income loss
• Operational expenses
• Maintaining NPA (non performing asset) buffers
• Early closure administrative costs

For lenders, early repayments mean less profit – hence the fees.

Part-Payment vs Full Foreclosure: Which Is Right?

Choose Part-Payment When:

• You have some surplus cash
• You do not want to empty your savings
• You wish to minimise EMI or tenure.
• Your lender charges no part-prepayment fees, or low fees

Part-payment means that you reduce your principal and therefore reduce your future interest.

Select Full Foreclosure When:

• You have a large lump sum
• You’re (early on) in the loan tenure
• Prepayment charges are low
• You want to be debt free as soon as possible

Full foreclosure provides the greatest interest savings when it is done early.

How Much Can You Save by Making a Personal Loan Prepayment?

Savings depend on:

• Loan amount
• Interest rate
• Remaining tenure
• Timing of prepayment
• Foreclosure charges

Example:

Loan: ₹4,00,000

Interest Rate: 15%

Tenure: 48 months

Outstanding after 12 months: ₹3,07,000

Foreclosure Charge = 3% = ₹9,210

GST = ₹1,657

Total Charge = ₹10,867

Interest saved on foreclosure after 12 months approx ₹48,000+

Even after having to pay fees you still save about ₹37,000.

This is why many borrowers prefer to close their debt early.

Important Factors to Consider Before Prepayment

Prepayment is not always the right thing to do. Evaluate the following:

Are you early or late for Tenure?

• Prepayment in first 12-18 months is maximum savings
• Minimal benefit for prepayment after the 30th month

Do you have other more Expensive Debts?

Before closing a personal loan, ask;

• Do you have credit card dues with 30-40 per cent interest?
• Do you have pay day / instant loan debt?

Always pay the high interest debt first.

Expenditures: Will It extend to your Emergency Fund?

Never close your loan if you are left with:

• No savings
• No cash buffer
• No backup for emergencies

Have a minimum of 3-6 months of expenses before foreclosing.

Are there any special offers from your Lender?

Banks and NBFCs sometimes reduce the charges of a foreclosure during:

• Festive sale months
• Year-end financial closing
• New customer campaigns
• You may save thousands by performing the planning at the right time.

Do you plan on applying for a New Loan any time soon?

Prepayment is a great way to improve your credit score, but it is not only that:

• Drops score for a short period of time if you close too many loans at once
• Reduces credit mix
• Affects credit age

It’s nonetheless positive long term, but make your plans wisely.

How does Prepayment affect your CIBIL Score

Prepayment can improve your credit score though not immediately.

Positive Effects

• Lower credit utilisation
• Reduced debt burden
• Increased repayment capacity
• Better creditworthiness

Temporary Neutral/ Negative effects

• Closing of old loans may lower average credit age
• Fewer accounts that are actively used may reduce credit mix

But on the whole, prepayment is viewed as good for your credit profile.

How to Prepay your Personal Loan or Foreclose your Loan

Different lenders follow different processes, but generally the following steps take place:

Call or Go to Your Lender’s/ Branch

They will look at what your outstanding balance was as of the date that you choose.

Ask to be given a Prepayment Statement

This includes:

• Outstanding principal
• Pending interest
• Applicable foreclosure charges
• Total amount payable

Make the Payment

You can pay through:

• NEFT/RTGS
• UPI (if allowed)
• Net banking
• Debit card
• Cash/cheque at the branch

Get a Loan Closure Verified Certificate

This is very important from your CIBIL update perspective.

Check Your CIBIL Report only After 30-45 Days

Just make sure to mark the loan closed.

How to Minimise Prepayment & Foreclosure Charges

Here are a few good ways of cutting your fees:

Improve Your Credit Score

Borrowers with high scores will be able to negotiate charges or obtain special offers.

Wait for Festive Offers

Many lenders waive or reduce foreclosure charges in the promotions.

Frequently make Part-Payments

Several small payments, each of which reduces principal as well as interest, avoid the need for complete foreclosure.

Negotiate with Your Bank

Especially if:

• You have a salary account
• You have been a customer for a long time
• You’re again borrowing from the same bank
• Banks are more flexible in comparison to NBFCs.

Check terms before taking the Loan

Avoid lenders with:

• High foreclosure charges
• Strict part-payment limits
• Long lock-in periods

Common Myths of Personal Loan Prepayment

1: Prepayment is constantly money-saving.

Not always, late tenure prepayment offers very low savings.

2: you are to drain your savings to settle the loan.

Wrong as it is, don’t skew up your emergency fund.

3: There are no lenders who do not permit the prepayment at any time.

The majority have a lock-in period of 6-12 months.

4: Prepayment makes your credit score shoot up.

It may take up to 45-60 days to reflect.

5: Digital lenders do not impose any foreclosure fees.

Many do–always read the terms.

Personal Loan Prepayment – Tips for Maximum Savings

Below are proven ideas on how to save the most:

Prepay during the first 12 months

Maximise interest savings.

Choose Part-Payment if foreclosure charges are high

This causes reductions in interest without the big one time fee.

For Prepayment using bonuses or incentives

Ideal sources include:

• Annual bonus
• Tax refund
• PF withdrawal
• Freelancing income

Strong Hold on to Your Emergency Fund.

Never pay back to the cost of being financially insecure.

Compare Foreclosure Charges From Lender to Lender Before You Borrow

A lender with:

• Slightly higher interest
• But lower foreclosure fees

may be cheaper overall.

Avoid Prepaying Towards the End of the Tenure

Interest savings are negligible after half-way mark.

How CreditMitra Aids Borrowers to Save Money

CreditMitra is offering support to borrowers through:

• Clearly outlined terms where there are no fees.
• Easy access to lending policies
• Tools to determine savings with prepayments
• Better loan matching in order to reduce future repayment stress

Smart borrowing + smart repaying = maximum savings.

Final Thoughts

Prepaying or foreclosing on a personal loan can save you a great deal of money – especially if you pre-pay or strategically foreclose early. However, having an understanding of the rules and charges and also the timing is crucial. Not all prepayments are equally beneficial and charges vary greatly from one lender to another.

Before taking action:

• Work out the actual savings that you will make

• Check foreclosure charges
• Guard your emergency cash.
• Compare lender policies
• Select the appropriate time according to your level of tenure

With the right strategy, you can lower your loan burden, save thousands in loan interest, and become debt free faster.