A prepayment penalty (also called foreclosure charge) is a fee a lender may levy if the borrower pays off the loan before the agreed tenure. RBI banned prepayment penalties on floating-rate home loans for individual borrowers in 2014. Other loan types and fixed-rate loans may still attract a penalty.
Where it still applies (India)
| Loan type & rate | Prepayment penalty? |
|---|---|
| Floating-rate home loan, individual borrower | No (RBI banned, 2014) |
| Fixed-rate home loan, individual borrower | Yes — typically 2% of outstanding |
| Home loan to a non-individual (firm, trust) | Yes |
| Personal loan, fixed-rate | Yes — 2%–5% of outstanding |
| Personal loan, floating-rate | Sometimes; bank-specific |
| Car loan | Often — 2%–6% of outstanding |
| Loan against property | Often — 2%–4% of outstanding |
Strategy implication
For a floating-rate home loan, a partial prepayment in year 3–5 of a 20-year tenure is always worth it — there is no penalty, and the interest saved over the remaining tenure dwarfs the prepayment amount.