Want to close your personal loan early, or pay a lump sum to cut it down? Many borrowers then find a charge in the small print. This guide explains when a lender can charge you for closing a personal loan early, what RBI rules say as of October 2026, and how to check whether closing early still saves you money.
What is a personal loan foreclosure charge?
Foreclosure means repaying the whole loan before its end date and closing it. Part-prepayment means paying a lump sum on top of your EMI (equated monthly instalment, the fixed amount you pay each month) to reduce what you owe.
Some lenders charge a fee for either. It is usually a percentage of the amount, and GST is added on top. The lender charges it because it loses the interest it expected to earn.
Whether a lender can charge you depends mainly on two things: whether your interest rate is fixed or floating, and when the loan was sanctioned.
What do RBI rules say about personal loan prepayment charges?
RBI's Pre-payment Charges on Loans Directions, 2025 apply to loans sanctioned or renewed on or after 1 January 2026. They cover commercial banks (except payments banks), co-operative banks, NBFCs (non-banking finance companies) and All India Financial Institutions. The main points:
- Floating rate, taken by an individual for a non-business purpose: no pre-payment charge, for part or full prepayment. This holds whatever the source of the money, and there is no minimum lock-in period.
- Fixed rate: charges follow the lender's approved policy. For term loans, any charge must be based on the amount being prepaid.
- Disclosure: whether a charge applies must be clearly stated in the sanction letter and loan agreement, and in the Key Facts Statement (KFS) where one is required. A charge not disclosed this way cannot be levied.
- Lender's request: if the lender asks you to prepay, it cannot charge you.
- No surprise charges: a charge the lender waived earlier cannot be added back when you prepay.
- Loans that switch between fixed and floating: the rule depends on whether the loan is on a floating rate on the day you prepay.
What about older loans? For floating-rate term loans to individual borrowers, RBI barred banks from charging foreclosure penalties in May 2014 and applied a similar bar to NBFCs in July 2014. Fixed-rate personal loans taken before 2026 follow the terms of your agreement.
Is your personal loan fixed or floating?
Look at your KFS or sanction letter. It names the rate type. Published examples show that both kinds exist:
- SBI: its personal loan FAQ says the loan is on a fixed rate of interest, linked to the bank's 2-year MCLR (marginal cost of funds based lending rate, a bank's internal benchmark). Its rate page shows 10.00% to 15.00% (2-year MCLR of 8.75% plus a spread of 1.25% to 6.25%), with effect from 15 December 2025.
- Union Bank of India: its retail rate sheet effective 8 October 2026 prices personal loans over its EBLR (external benchmark lending rate) of 8.25%, which is RBI's repo rate of 5.50% plus 2.75%. Salaried rates run from 9.30% to 12.60%, depending on credit score. The same sheet offers a one-time switch from floating to fixed after 12 EMIs.
The repo rate is the rate at which RBI lends to banks. An EBLR loan moves when that benchmark moves.
What do lenders charge? Some verified examples
| Lender and document | What it says |
|---|---|
| SBI personal loan FAQ | Prepayment in full or in part, or closure, before 3 years: 2% on the prepaid amount |
| SBI personal loan KFS | Generally no prepayment charge after 3 years. But if another bank takes over the loan and it is fully closed, 2% of the outstanding amount applies, whatever the tenure, subject to RBI directions |
| Kotak Mahindra Bank guide (older loans) | For sanction letters issued on or before 21 June 2023: 4% of outstanding principal up to 3 years, 2% after, plus GST |
| Kotak Mahindra Bank guide (GST) | 18% GST applies to processing fees and prepayment charges on personal loans |
These are examples, not the terms of every loan. Your own KFS and loan agreement decide what you pay.
Does closing early still save money? A worked example
The EMI formula is: EMI = P × r × (1 + r)^n ÷ [(1 + r)^n − 1]. Here P is the loan amount, r is the monthly rate (yearly rate ÷ 12 ÷ 100) and n is the number of months.
Say you took ₹5,00,000 at a fixed 14% for 60 months. Your EMI is ₹11,634. After 18 EMIs, you still owe ₹3,84,558. Assume your KFS shows a 2% charge on the amount prepaid (an assumption; yours may differ).
| Item | Close the loan fully | Prepay ₹1,00,000, keep the EMI |
|---|---|---|
| Amount prepaid | ₹3,84,558 | ₹1,00,000 |
| Interest you no longer pay | ₹1,04,075 | ₹51,650 |
| Charge at 2% + 18% GST | ₹9,076 | ₹2,360 |
| Net saving | ₹94,999 | ₹49,290 |
| Loan ends | Now | 29 more EMIs instead of 42 (13 months sooner) |
How the full-closure numbers work: the 42 EMIs left add up to ₹4,88,633. You pay ₹3,84,558 today instead, so you avoid ₹1,04,075 of interest. The charge is 2% of ₹3,84,558, which is ₹7,691, plus GST, giving ₹9,076.
So even with a 2% charge, closing early in this example saves far more than it costs. Generally, the higher your rate and the earlier you prepay, the more interest you avoid.
When might closing early not be worth it?
- Near the end of the loan. In the same example, after 54 EMIs you owe ₹67,041 and only ₹2,764 of interest is left. A 2% charge with GST would be ₹1,582, so you would save only ₹1,182.
- When the charge is on the full outstanding amount, as in some older loans. The charge is then bigger than in the example above.
- When it empties your emergency fund. If you then need a new loan for an emergency, it may cost more than the loan you closed.
- When you move the loan to another bank. Some lenders keep a charge on takeovers even after the usual charge-free period, as the SBI KFS shows. Read the takeover clause.
How do you foreclose a personal loan, step by step?
- Find your KFS and sanction letter. Note the rate type, the sanction date and the prepayment clause.
- Ask for a foreclosure statement in writing. It should show the principal, interest to date, any charge and GST.
- Check the charge. Compare it with what your documents disclose. If your loan is floating-rate, for a non-business purpose and sanctioned on or after 1 January 2026, quote paragraph 5 of the 2025 Directions.
- Ask for a waiver if a charge applies. There is no harm in asking. The lender decides.
- Pay through a traceable mode and keep the receipt.
- Collect a no-dues certificate (NOC) once the account is closed.
- Check your credit report after a few weeks. Since 1 January 2025, RBI requires lenders to report credit information to credit bureaus every fortnight. The loan should show as closed.
Do it in 10 minutes, free
Use the LowerMyEMI prepayment calculator to see how much interest a lump sum saves, and how many months it cuts. Add any charge from your KFS to see the net result. You can export it to Excel or PDF.
If you cannot prepay but your rate feels high, LowerMyEMI can write one email per lender asking for a lower-rate offer, plus a letter to your own lender. You send them from your own email. We are not a lender and never promise a rate; each lender decides.