Paying a loan off early is one of the few guaranteed returns in personal finance: every rupee of principal you clear stops attracting interest. It is also one of the rights on our borrower rights checklist that lenders have historically made expensive. The RBI’s Pre-payment Charges on Loans Directions, 2025 changed that. Here is what the rules say, how to work out whether prepaying is worth it, and how to close a loan cleanly.
Prepayment, part-payment and foreclosure
Part-prepayment
You pay a lump sum on top of your EMI. The outstanding principal falls, and you choose a shorter tenure or a smaller EMI.
Foreclosure
You pay the entire outstanding principal (plus interest to date) and close the loan before its last EMI.
Lock-in
A period during which a lender doesn’t accept prepayment. Not allowed on loans covered by the no-charge rule.
Prepayment charge
A fee, usually a percentage plus GST, for paying early. Allowed only in some cases, and only if disclosed upfront.
What the RBI’s 2025 directions say
The RBI issued the Pre-payment Charges on Loans Directions, 2025 on 2 July 2025. They apply to banks (except payments banks), co-operative banks, NBFCs and all-India financial institutions, for loans sanctioned or renewed on or after 1 January 2026.
| Type of loan | Can the lender charge for prepaying? |
|---|---|
| Floating-rate loan to an individual, not for business (home loan, many loans against property, floating-rate personal loans) | No. Nothing for part or full prepayment, whatever the source of the money, with no minimum lock-in |
| Floating-rate business loan to an individual or micro/small enterprise, from a commercial bank or upper-layer NBFC | No |
| Floating-rate business loan to an individual or MSE, from a small finance bank, RRB, some co-operative banks or middle-layer NBFC | No for loans up to ₹50 lakh |
| Fixed-rate loans (most personal loans) | Possibly, as per the lender’s board-approved policy, calculated on the amount prepaid, and only if disclosed in the KFS and loan agreement |
| Any loan where the lender initiates the prepayment | No |
Summary of the RBI (Pre-payment Charges on Loans) Directions, 2025 as of October 2026. Dual or special-rate loans follow the floating-rate rule if they are floating when you prepay. Loans sanctioned before 2026 follow earlier rules and their own agreement.
Three more protections apply to everyone:
- Disclosure or nothing. A prepayment charge must be in the sanction letter, loan agreement and Key Fact Statement. If it wasn’t disclosed, it can’t be levied.
- No back-dating. A charge the lender waived earlier cannot be imposed retrospectively.
- On the prepaid amount. For term loans, any permitted charge is worked out on the amount you prepay, not on the original loan.
Is prepaying worth it? A worked example
Take an illustrative personal loan: ₹3,00,000 at 16% a year (reducing balance) for 36 months. The EMI is ₹10,547 and total interest over three years is ₹79,696. After 12 EMIs, ₹2,15,409 is still outstanding and ₹37,721 of interest is still to come. Say you now have ₹1,00,000 spare.
Interest still to pay after month 12, by choice
Illustrative loan, not an Omozing quote: ₹3,00,000, 16% a year reducing balance, 36 months, prepayment after the 12th EMI. Excludes any prepayment charge; our calculation.
Now add a charge. Suppose this fixed-rate loan’s KFS had disclosed a 4% prepayment charge plus GST (an illustrative figure). On a ₹1,00,000 part-prepayment, that is ₹4,720. Choosing the shorter tenure saves ₹27,546 of interest, so you are still about ₹22,800 ahead. Foreclosing the full ₹2,15,409 would cost ₹10,167 in charges against ₹37,721 of interest saved: about ₹27,500 ahead.
The rule of thumb: prepaying early in the tenure, when most of each EMI is interest, saves the most. Prepaying in the last few months saves little, and a charge can wipe that out. Keeping the EMI the same and shortening the tenure almost always saves more than lowering the EMI.
Before you prepay, keep a cushion
Don’t empty your emergency fund to close a loan. If an emergency forces you into a loan app next month, you will pay far more than you saved. Our guide on building an emergency fund first explains how much to keep.
How to close a loan cleanly: 6 steps
Ask for a foreclosure statement
Request it in writing. It shows outstanding principal, interest to date and any charge, with a validity date.
Check it against your KFS
Any charge must match what the KFS disclosed. If it doesn’t, ask which clause allows it.
Pay through official channels only
Use the lender’s app, website or its bank account. Keep the payment reference.
Get your No Dues Certificate
Ask for the NOC and the return of any cheques or documents you gave.
Cancel the e-mandate
Make sure the lender stops your e-NACH mandate so no further EMI is debited.
Check your credit report
Within a few weeks, the account should show as “Closed”, not “Settled”. The difference matters, as we explain in written-off vs settled. Bureaus now get lender updates four times a month, so this shows faster than before (see weekly credit reporting).
Prepaying with a cheaper loan
Sometimes the smartest prepayment is with someone else’s money: moving an expensive loan to a cheaper one through a balance transfer or refinance. Compare the new loan’s APR against your current one, subtract any foreclosure charge and the new processing fee, and switch only if the saving is clear. Our balance transfer guide works through the maths. If you are juggling several short-term app loans, Omozing’s SmartSwitch replaces them with one personal loan and one EMI.
Know your prepayment terms before you borrow
Omozing personal loans for salaried people start from 11% a year. Your rate, every fee, the APR and the prepayment terms are all in your Key Fact Statement before you sign.
Frequently asked questions
Can a bank or NBFC charge for prepaying a personal loan?
On a floating-rate loan to an individual for a non-business purpose, no. On a fixed-rate personal loan, a lender may charge as per its policy, but only if the charge was disclosed in the KFS and loan agreement, and calculated on the amount prepaid.
When did the RBI’s new prepayment rules start?
The RBI issued the Pre-payment Charges on Loans Directions, 2025 on 2 July 2025. They apply to loans sanctioned or renewed on or after 1 January 2026.
Is there a lock-in period before I can prepay?
For loans covered by the no-charge rule, such as floating-rate loans to individuals for non-business purposes, there is no minimum lock-in. For other loans, check your KFS and loan agreement.
Is part-prepayment better than foreclosure?
Both save interest. Foreclosure saves the most if you can do it without draining your emergency savings. With a part-prepayment, keeping the EMI and shortening the tenure usually saves more interest than reducing the EMI.
Does closing a loan early hurt my credit score?
Closing a loan in full is a positive event. The account shows as closed, and your debt falls. Make sure it is reported as “Closed”, not “Settled”, and check your credit report a few weeks later.
What if a lender charges a prepayment fee not in my KFS?
Under the RBI’s rules, an undisclosed charge cannot be levied. Write to the lender’s grievance officer citing your KFS, and escalate to the RBI at cms.rbi.org.in if it isn’t resolved within 30 days.
Sources: RBI (Pre-payment Charges on Loans) Directions, 2025, RBI/2025-26/64, 2 July 2025, applicable to loans sanctioned or renewed from 1 January 2026; RBI circular on Key Facts Statement for loans and advances, 15 April 2024. Rules as of October 2026; check rbi.org.in before acting. This is general information, not financial or legal advice.
Omozing is the digital lending brand of Aparampaar Finance Private Limited, an RBI-registered non-deposit-taking NBFC. See our regulatory disclosures and grievance redressal process.