Foreclosing a personal loan in India is a good financial move if you have surplus funds and wish to reduce your debt burden. But understand the consequences, especially the foreclosure fees on personal loans levied by lenders. Here's all you should know about personal loan foreclosure, the typical foreclosure fees on personal loans, and how to make the right decision.

What is Personal Loan Foreclosure?

Personal loan foreclosure involves making entire repayment of your existing loan balance prior to the loan maturity date. When you foreclose, you pay interest less in the future but can be penalized. Indian lenders charge a personal loan foreclosure charge most often as a fee to recover the loss of interest in advance.

Why Do Lenders Charge Foreclosure Fees?

Banks and NBFCs earn their revenues on interest on your EMIs. When you foreclosure early, they lose some component of the expected interest income. To compensate for this, they charge foreclosure charges on personal loans usually in the form of a percentage of outstanding principal.

Foreclosure Charges Typical in India

The personal loan foreclosure charges may differ substantially based on the lender, loan amount, and tenure completed. Here's a general idea:

1. 0% to 4% of the loan outstanding

2. Some lenders exempt charges if foreclosure is undertaken after a specified duration     (e.g.12-24 months)

3. Charges might be greater if you foreclose early in the loan tenure

Example: If your loan outstanding is ₹2,00,000 and your lender's foreclosure charge is 3%, you will have to pay ₹6,000 as a fee.

RBI Guidelines on Personal Loan Foreclosure

The Reserve Bank of India (RBI) has directed that banks and NBFCs will not be allowed to levy foreclosure charges on floating-rate loans from individual borrowers. But the majority of personal loans are fixed-rate interest, in which foreclosure fees are still recoverable unless exempted by the lender.

Precautions While Foreclosing Personal Loan

• Foreclosure Policy: Carefully go through your loan document to see what charges apply.

• Negotiate Charges: Some banks may reduce or waive fees if you have a good credit record or long-standing relationship.

• Compare Savings: Weigh the foreclosure charges against the interest you’ll save to decide if it's worth it.

• Get a NOC: After foreclosure, collect a No Objection Certificate (NOC) from your lender to ensure the loan is closed officially.

Conclusion

While personal loan foreclosure can make you debt-free sooner, keep in mind that foreclosure charges on personal loans can impact your savings. Compare the personal loan foreclosure charges and make sure that the benefits outweigh the drawbacks. Being financially educated enables you to make sound credit decisions and avoid additional charges.