Personal Loan Foreclosure: Pros, Cons & Hidden Costs

Neha has been working as an HR at Jagdamba Tiles Corp. for the last 9 years. This year, she got a work bonus of ₹2.5 lakh. So, decided to pay off the remaining ₹2.3 lakh loan amount early. Sounds all righteous, fun, and like a total win-win. ‘Ruko zara, suspense to suno!’

The bank asked her to pay ₹7,500 as a foreclosure charge. If she had known about these charges before, she would not have invested the remaining ₹20,000 in mutual funds.

Here’s how her numbers looked:

None of us wants to experience what Neha did. So, it is necessary to know about the pros, cons and extra costs involved with a personal loan foreclosure. And that is exactly what we are going to do today. ‘Hum kisi se kam hai kya?’

What Is Foreclosure (Pre‑Closure) of a Personal Loan?

If you have a loan, you find ways to pay it early and get away with ‘befaltu ke interest’. That is what foreclosure is: repaying your entire personal loan or the interest before the scheduled end date. 

According to the RBI, borrowers can foreclose floating‑rate personal loans anytime without penalty. But the moment the bank sees that it is a fixed‑rate loan, you have to pay charges depending on their policy. Typically, it is 2-6% of the outstanding amount.

Also Read - Smart Ways to Repay a Loan Faster Without Extra Charges

For example,  Sonal took a ₹5 lakh floating‑rate personal loan. After 18 months, she used a ₹1 lakh bonus to foreclose the loan. Since it was a floating-rate loan, no foreclosure charge was applied, but what would happen in the case of a fixed-rate loan? Let’s find the answer in the table given below.

Pros

 1. Save on Interest

Amit saved ₹94,956 in interest by paying his ₹5 lakh personal loan earlier than the fixed tenure of 5 years. He foreclosed after 12 months, using the business profit of ₹4,38,000 he earned over a year. This is how his finances looked:

2. Reduce Monthly EMI Burden

Swati had a ₹3,00,000 loan at 14% for 3 years. Her EMI was ₹10,250. She foreclosed after 15 months by paying the remaining principal of ₹1,85,000. The table given below shows the financial impact of the foreclosure.

Cons

Read More – How It Will Benefit Small Borrowers, Entrepreneurs

1. Foreclosure Charges Can Eat into Savings

Inspired by Swati and Amit, Neeraj decided to foreclose his ₹6,00,000 personal loan. The interest rate was 14%, and the tenure was 5 years. He paid EMIs for 10 months (₹13,962/month) and foreclosed by paying ₹5,25,000. But, he had to pay ₹21,000 extra as foreclosure fees.

2. Foreclosure Too Late = Minimal Savings

Sunita took a ₹3,00,000 personal loan at 13% for 3 years. Her EMI was ₹10,121. She foreclosed after 26 EMIs by paying ₹89,000. But most interest was already paid in early EMIs, so net savings were not more than ₹10,430.

Hidden Costs of Foreclosure

Now, let’s discuss the charges applicable for foreclosure. First is the foreclosure fees, which are generally 2-5% and also the 18% GST. You’ll also encounter processing fees (0.5-3%) and legal/ documentation charges, all subject to GST. 

For example, Ravi took a ₹4 lakh personal loan in January 2023 at a fixed interest rate of 12.5% for 4 years. After 20 months, he received a bonus and decided to foreclose his loan. But the foreclosure fee and other charges (₹10,702.60) made it costlier than expected,

This table shows the breakdown of the charges involved.

Conclusion

If you want to save big on interest, foreclose your personal loan, but do it smartly. Know about all the extra charges involved and always compare savings with costs before deciding. Becoming debt-free is a huge success, and it should come with extra money.

Frequently Asked Questions

1. Is it good to foreclose a personal loan?

Yes, if foreclosure charges are lower than future interest savings. It also improves credit health. 

2. Is it mandatory to pay foreclosure charges on a personal loan?

Only if your loan is a fixed-rate loan, floating-rate loans don't carry foreclosure fees per the RBI regulation. 

3. Will my CIBIL score improve if I foreclose my loan?

Yes, responsible foreclosure reduces debt exposure and can improve the CIBIL score gradually. 

4. Which is better, prepayment or foreclosure?

Both help save interest. Prepayment reduces principal gradually; foreclosure closes the debt entirely. Choose based on available funds.