Prepayment Charge
A fee for repaying a loan, fully or partly, ahead of schedule.
RBI bars foreclosure charges on floating-rate home loans to individuals. Fixed-rate home loans, personal loans and business loans can still carry 2% to 5% of the prepaid amount.
Why Prepayment Charge matters when comparing products
Prepayment charges are a crucial factor when comparing financial products in India because they impact the true cost of borrowing if a borrower plans to settle the loan early. While RBI regulations prohibit foreclosure charges on floating-rate home loans for individuals, other loan types like fixed-rate home loans, personal loans, and business loans may still levy these fees. Understanding these charges helps borrowers evaluate the flexibility and overall expense of different loan options before committing.
Illustrative example
Suppose an individual has a fixed-rate personal loan with an outstanding principal of ₹5,00,000. If the loan agreement includes a 3% prepayment charge, repaying the entire loan early would incur a charge of ₹15,000 (3% of ₹5,00,000). This amount would be added to the principal balance due at the time of prepayment, affecting the final outgo for the borrower.