"Learn about personal loan foreclosure, applicable rules, and foreclosure charges on personal loans before closing your loan early."
Published: 9 April 2025
Updated: 9 April 2025
Repaying your personal loan through monthly EMIs helps you stay financially planned and stress-free, avoiding hefty one-time payments. However, if you have hit the jackpot and want to repay your loan before the scheduled tenure, in banking terms, it is referred to as foreclosure. While this will help you stay stress-free of regular payments and make you open to new loans, it may come with certain charges.
Understanding these charges will help you make a much better and wiser financial decision. In this blog, we’ll cover everything from how to foreclose your personal loan to RBI guidelines regarding the foreclosure process.
Is it good to foreclose a personal loan? To know the answer, here are some key benefits that come with foreclosure of a personal loan:
If you foreclose your loan, you can save on the high-interest rates that you’d have to pay at the end of the term. Especially, if you have chosen a floating interest rate and you can see a rise in the rate later, paying the amount before it rises will save you a chunk of your income.
Once your loan is paid, you will go back to being a debt-free individual without having any financial burden. This will open you to many investment opportunities, along with easy approval for new loans.
Foreclosing your loan will increase your chances of loan approval and overall credit history. A better debt-to-income ratio will allow you to access better loan options and lower interest rates.
Personal loan foreclosure charges are the fees imposed by the lender if you choose to foreclose your loan before the agreed-upon loan period. It comes with various benefits and reduced loan liability. Foreclosure charges are typically a percentage of the principal amount or the remaining amount.
Note: Prepayment and foreclosure are different, although related, loan repayment scenarios. Prepayment involves paying off a part or the entire loan before the scheduled due date, while foreclosure is the complete repayment of the loan, effectively closing the account, before the end of the loan term.
Some banks also have zero or minimal fixed foreclosure charges on personal loans. However, it is crucial to go through the terms and conditions when applying for the loan or opting for foreclosure of the loan.
Yes, and many banks and NBFCs charge a percentage of the outstanding or principal amount as the foreclosure charges. If you foreclose your loan, then the bank doesn’t receive the agreed interest rate for the remaining tenure. To cover this loss, a small percentage, around 2 - 6 %, a foreclosure fee is levied. You can use an online personal loan foreclosure calculator to help you know the remaining amount for your loan.
Unsure about how are foreclosure fees calculated?
Example: Let’s say you take a personal loan of ₹5,00,000 for five years with a foreclosure charge of 4%. If you decide to foreclose the loan after two years, and the remaining loan balance at that time is ₹3,00,000, the foreclosure fee will be:
Foreclosure Fee = 4% of ₹3,00,000 = ₹12,000
This means you will need to pay ₹12,000 as a foreclosure charge along with the remaining loan balance to close the loan early.
RBI guidelines mention that certified banks and NBFCs can’t levy prepayment or foreclosure fees on loans that are credited on a floating rate of interest. This policy focuses on personal loans or loans that are sanctioned for reasons other than business. This includes both single and co-applicant loans.
One of the key doubts that can creep in if you’re thinking about foreclosing your loan amount is the impact it will have on your CIBIL score. While it may be a great financial decision to foreclose your loan, it can negatively affect your credit score.
Foreclosing your loan account can result in a double or even triple-digit drop in your CIBIL score. While it sounds surprising, this is due to the limited data available to assess your credit score by the bureau.
If you are searching for what happens if I foreclose my EMI? The answer depends on the choice of bank and the type of loan. Many reputable banks, such as Axis, HDFC and others, levy a small foreclosure fee on their personal loan.
Several banks and NBFCs offer a personal loan with zero foreclosure charges to help you stay stress-free and build your credit history. Here are a few examples
To learn how to close personal loan early, review the steps:
Reach out to your bank or financial provider to give you a foreclosure statement. This document has all the necessary information, such as outstanding amount, accrued interest and foreclosure charges.
Every financial process requires some specific documentation. For foreclosure, you need to submit your personal documents such as address proof, identity proof, last EMI statement, bank account details, etc.
Once you have collected the amount, including the foreclosure charge, pay it to the lender via cheque, online or cash.
After the payment is verified and completed, there are some documents that you must collect from the bank for future reference:
Make sure to update your CIBIL report or credit report of the loan as closed. This will help you build your score and avoid any penalties.
Foreclosing your loan account can be a lovely and powerful feeling. It sets you free from the liability of a loan and fixed monthly expenses. While it may come at a small foreclosure charge, you get a boosted credit history, better financial knowledge and attractive loan options in the future. However, to ensure the foreclosure process goes smoothly and hassle-free, opt for an online personal loan from My Mudra. We help you get the lowest interest rates, minimal documentation and an all-online application process for a quick and reliable procedure.
Ready to take the next step after foreclosure? Apply for a fresh loan with My Mudra in just a few clicks!
