How to Prepay or Foreclose Your Personal Loan

3 min read | Updated on November 20, 2025, 17:21 IST

Jaiprakash Associates has defaulted on loans worth ₹4,616 crore, including principal and interest amount.

Have some extra cash and think you are thinking about closing your personal loan early? You are thinking on point! Paying off a loan before schedule can save you thousands in interest. But before you rush to the bank with your cheque book, there are some important rules and hidden charges you need to know about.

Understanding the basic terms

Different terminologies related to loans

Prepayment is when you pay a lump sum amount to reduce your principal, but don't close the loan completely. You then either reduce your equated monthly instalments (EMI) amount or shorten your loan tenure.

Foreclosure means closing your entire loan before the scheduled end date. You pay off the entire outstanding amount in one go and the loan is completely closed. Both have different rules attached.

What the RBI says about prepayment charges

The Reserve Bank of India (RBI) issued new directions in July 2025 that will come into effect from 1st January 2026, which will benefit borrowers who look forward to closing the loan.

From 1st January 2026, banks and NBFCs cannot charge prepayment or foreclosure penalties on personal loans with floating interest rates.

However, if you have taken a fixed-rate personal loan, lenders are still allowed to charge foreclosure fees. These charges range from 2% to 6% of the outstanding principal amount. Read your loan document carefully to know these charges.

Steps to prepay or foreclose your loan

If you have decided to go ahead, the process is,

Check your loan agreement for any prepayment clauses, lock-in periods or charges.
Call your bank or visit the branch to inform them about your intention to prepay or foreclose.
Request a loan closure statement showing the exact outstanding amount as of a specific date.
Gather required documents – usually your loan account number, identification proof (ID proofs) and a prepayment application form.
Make the payment through the specified method (cheque, demand draft, online transfer or cash).
Collect your closure letter and No Objection Certificate (NOC) once the payment is processed.
Check your credit report after 30-45 days to ensure the loan shows as ‘closed’.

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How can you save more by prepayment?

Want to make the most of your prepayment? Mathematics concludes strategies below

Prepay early in the loan tenure

The earlier you prepay, the more you save because most of your initial EMIs go towards interest. Prepaying in year 1 or 2 has maximum impact.

Target high-interest loans first

If you have multiple loans, always prepay the one with the highest interest rate first. Personal loans have higher rates than home or car loans.

Negotiate with your lender

If you are facing prepayment charges, try negotiating. Some banks waive fees, especially if you have maintained a solid repayment record.

Consider the opportunity cost

Before prepaying, ask yourself if that money could earn better returns elsewhere. If you can invest it at 15% returns and your loan charges 12%, mathematically, it makes sense to invest rather than prepay.

When prepayment might not make sense

Whilst prepaying sounds great, in some cases, you can avoid it, like,

If you are close to the end of your loan tenure (last 6-12 months), most interest is already paid.
If prepayment leaves you cash-strapped for immediate needs.

The final word

Prepaying or foreclosing your personal loan is the smartest step towards saving a significant sum on interest and being debt-free. Just understand the rules and costs involved. Always read your loan agreement carefully, confirm charges with your lender and calculate whether the savings justify any fees you might pay.

About Author

Pradnya Surana

Sub-Editor

is an engineering and management graduate with 12 years of experience in India’s leading banks. With a natural flair for writing and a passion for all things finance, she reinvented herself as a financial writer. Her work reflects her ability to view the industry from both sides of the table, the financial service provider and the consumer. Experience in fast paced consumer facing roles adds depth, clarity and relevance to her writing.