A prepayment penalty is a charge that lenders impose if you pay off a part of your personal loan much before your schedule. For example, an individual has taken a personal loan and has been paying the EMIs for the past 2 years. Now, he has decided to pay off a part of his loan. In such a case, he has to pay a specific percentage as a penalty to the  lender. Usually, the prepayment penalty on a personal loan begins after a lock-in period that is determined by the lender. 

Why do Banks Charge Prepayment Fees?

Banks pay a lower interest rate when they borrow funds as compared to the interest rate they levy when they lend money. The difference between the two rates is the money earned by the bank on the loan. If a customer pays off their loan early, the interest earned by the bank on the remaining period of the loan will be low. The bank will then make up for this loss by charging a prepayment penalty.    

The prepayment fee varies across banks, but it is generally between 4% to 5% of the outstanding loan amount. Further, the prepayment fees may differ based on how long the loan has been active. Some banks may not charge any prepayment fees after three years, while others offer decreased rates after a certain period of the loan. 

Personal Loan Pre-payment Charges of Top Lenders

Bank 

Prepayment charge 

Prepayment Period 

State Bank of India 
  • 3% on amount being prepaid for Xpress Credit, Xpress Power, and Pension Loans 
 
  • No prepayment or foreclosure charges if the loan account is closed with the funds received from a new  loan under the same scheme.

According to the bank’s terms and conditions 

Kotak Mahindra Bank 

Rs. 500 plus GST applicable on  principal amount outstanding per instance 

Prepayment can only be done after 12 months beginning from the date of the first EMI payment 

Axis Bank 

2% to 5% of the outstanding loan amount 

Up to 5% of the principal outstanding 

HSBC

Up to 3.75% of the principal outstanding 

Pre-payment or foreclosure on a personal loan can be done only after the mandatory lock-in period gets completed 

IndusInd Bank 

Prepayment penalty on loans for salaried individuals is 4% of the principal outstanding 

 

Prepayment penalty on loans for self-employed individuals is 4% of the principal outstanding 

Salaried borrowers can foreclose or prepay the loan after making 12 EMI payments

 

Self-employed borrowers can foreclose or pre-pay the loan after paying 6 EMIs

Citibank 

At the discretion of the bank 

Contact the bank for more information 

Yes Bank 

4% of principal due if closed between 13 to 24 months

 

3% of principal due if closed between 25 to 36 months 

 

2% of principal due if closed between 37 to 48 months

 

No foreclosure charges if prepaid after 48 months  

Loans can be foreclosed only after 12 loan EMIs are paid 

IDBI Bank 

Prepayment penalty of 2% of the loan amount due will be levied for part or full prepayment within 6 months from the loan disbursal date. 

 

No loan will be sanctioned before a period of 12 months starting from the date on which the borrowers have prepaid or foreclosed their last loan. 

 

Borrowers may be allowed foreclose or prepay their loan 6 months after the date of disbursal without any penalty

 

Fullerton India 

7% for salaried or self-employed borrowers when the loan is closed between 7 to 17 months from agreement date

 

7% for salaried or self-employed borrowers when the loan is closed between 18 to 23 months from agreement date

 

3% for salaried or self-employed borrowers when the loan is closed between 24 to 35 months from agreement date

 

No charge to be levied for salaried/self-employed borrowers when the loan is closed after 36 months from agreement date

 

 

The loan can be foreclosed only after 6 months from the disbursal date

 

The loan amount can be repaid at any time during the loan duration

 

How Do Customers Handle Prepayment Charges on Their Personal Loans?

  • Customers must not choose packages that give low prepayment fees. 
  • The prepayment calculator can be used to evaluate the benefits you could get from low prepayment charges. 
  • Prepayment entirely depends on the financial standing of the customer. If the customer is going to get a big boost in his income, then he can go in for prepayment. Otherwise, it is good to consider packages with low rates of interest.                                

What Are The Benefits of Personal Loan Prepayment? 

  1. Become debt free quickly: Suppose you have taken a personal loan and you have to repay it. If you default on it, then it will become a financial burden. Personal loan EMIs also take away a good part of your monthly income. This is why when you have extra income coming your way, you should prepay your personal loan fully.  Even though you have to pay a prepayment penalty, it is nominal. Prepayment will help you go debt-free and the EMIs will no longer eat up your savings.  
  2. Decreased interest outflow: One of the most important aspects to consider in loan prepayment is the lock-in-period. This refers to the period during which the lender does not accept any prepayments from the borrower, full or partial towards the loan amount. However, once the lock-in-period is over and some extra income is coming your way, try prepaying your loan in full or partial. This will help in saving considerably on the interest amount that you will have to pay even if there is going to be a prepayment penalty. 
  3. Improve Your Credit Score: When you prepay your loan, fully or partially, you are decreasing your debt burden in one shot. This helps in improving your credit score as loans due have a direct impact on your credit score. 
  4. Partial prepayments can decrease your debts: When you partially prepay your loan, it will lower the outstanding loan amount as well as the interest that you will have to pay over the remaining period of the loan. But, ideally it is good to prepay your loan during the early years of your loan tenure. 

FAQs

1. Is partial prepayment of a personal loan beneficial? 

If you lack the funds for full prepayment, then it is really beneficial to make partial prepayment to your personal loan. This will reduce your outstanding loan amount considerably and will help you plan your future EMIs.  

2. What are the primary parameters that determine the prepayment penalty on a personal loan?

The primary factors are the type of loan, lender, loan tenure, and interest rate.