What Happens If You Foreclose a Personal Loan Early: Complete Guide

Key Highlights
 

1. If you can close your personal loan early, you can save a lot even after paying a foreclosure fee. Your total interest will be reduced, and your debt period will be shortened. 
    
2. Prepayment means paying a part of the loan and continuing the loan. Foreclosure means paying the full remaining amount and closing the loan completely.
    
3. Most lenders charge around 2% to 6% of the remaining loan amount as foreclosure charges. Always ask for a foreclosure statement before making a payment.

A personal loan is a type of unsecured loan offered by banks, NBFCs (Non-Banking Financial Companies), or digital lenders..

Anita took a personal loan of ₹5,00,000 in April 2023 from a reputed bank at an interest rate of 13% per annum for a tenure of 4 years (48 months). Her EMI was ₹13,410. After paying EMIs for 18 months, she received an inheritance and decided to foreclose the loan in October 2024.

Breakdown of her payments and foreclosure details:

By foreclosing early, Anita reduced her interest burden significantly, even after paying a 3% foreclosure charge. She gained financial freedom nearly 2.5 years ahead of schedule.

How Foreclosing a Personal Loan Early Will Affect You?

When you foreclose a personal loan early, you repay the entire remaining amount before the loan term ends. This usually means:

• You save on interest payments, as you won’t pay interest on future EMIs.
   
• You become debt-free sooner, freeing up your money for other uses.
   
• Your credit score may improve because of timely full repayment.

However, some lenders may charge a foreclosure fee (typically 2-6% of the outstanding amount). Also, if your loan has tax benefits, you might lose some deductions (though this rarely applies to personal loans).

Why Do People Foreclose Personal Loans Early?

Do you know that lenders cannot charge foreclosure or pre-payment fees on floating-rate personal loans or small business loans? This advisory was introduced by the RBI and is effective for loans sanctioned or renewed from January 1, 2026. 

People apply for loans because of their weak finances or inability to accumulate a large sum over a certain period. Once their financial situation improves, many choose to close the loan early to save on interest. Here are other reasons that make foreclosure such a suitable option:

At the end of the day, it's their personal finances that people are concerned about. When they find a way they save money, they will go with it. Also, foreclosing on a personal loan early relieves you from years of stress and increases your credit score.

How Early Foreclosure Works

Foreclosing a personal loan early involves a few simple but important steps: contacting your lender, checking your outstanding balance, and settling the total due, including any foreclosure charges. Let’s understand this through an example:

Aarav took a personal loan of ₹6,00,000 in March 2023 from his bank at an interest rate of 13% per annum for 4 years (48 months). His monthly EMI was ₹16,046. By June 2024, after paying for 15 months, he received a lump sum from a freelance project and decided to foreclose the loan.

Here’s what he did:
 

1. Contacted the Lender
   Aarav visited the bank and requested the foreclosure statement, which included the outstanding principal and any charges.
    
2. Reviewed Outstanding Amount
   After 15 EMIs, the remaining principal was ₹4,25,000.
    
3. Paid Foreclosure Charges
   The bank charged a 2% foreclosure fee:
   ₹4,25,000 × 2% = ₹8,500.
    
4. Settled the Loan
   Aarav paid ₹4,33,500 in total (outstanding + charges) and received a No Dues Certificate.

This process saved him over ₹1,00,000 in future interest and gave him complete peace of mind.

Foreclosure vs Prepayment: What’s the Difference?

While both prepayment and foreclosure involve repaying your loan earlier than scheduled, they differ in purpose, amount, and impact. Let’s understand this through Priya’s example and a simple table.

Priya took a personal loan of ₹5,00,000 in January 2023 for 36 months at 12% interest. Her EMI was ₹16,607.
 

1. In April 2024 (after 15 EMIs), she received ₹1,00,000 and decided to prepay part of the loan.
    
2. Later, in September 2024, she received more funds and decided to foreclose the loan entirely.

So, prepayment is paying just a portion of the loan, while foreclosing means paying the entire amount at once. The table given below differentiates between the two in detail.
 

In both cases, you have to pay a small fee. If you foreclose a personal account early, you are relieved from the interest at once, so in this case, the fee does not hurt much. However, in prepayment, you pay a fee as well as the interest for the remaining time period.

Conclusion

Foreclosing a personal loan early can be a wise financial decision, helping you save on interest and become debt-free faster. However, it’s important to consider any foreclosure charges and your overall financial situation before proceeding. Always review the terms with your lender to ensure early repayment truly benefits you.

FAQ’s
 

Do all banks charge a foreclosure fee if I close my loan early?
No. Some loans, like floating rate loans, do not have foreclosure charges as per RBI rules. Always check your loan agreement.
 

If my loan has a floating rate of interest, can the bank still charge foreclosure fees?
RBI rules say banks cannot charge foreclosure fees on many floating-rate personal loans. Confirm this with your bank.
 

Can I negotiate foreclosure charges with my bank?
Yes. If you have a good repayment history, you can request that the bank reduce or waive these charges.
 

Do I lose tax benefits if I close my personal loan early?
Personal loans usually do not have tax benefits like home loans. So there is no major tax impact. What Happens If You Foreclose a…
 

Does closing a loan early affect my credit score
In most cases, it improves your score as your debt reduces. Sometimes the score may dip slightly for a short time, but it recovers.
 

Can I convert my loan to EMI after making a prepayment?
Many banks allow you to choose between reducing your EMI and reducing your loan tenure. Reducing the tenure saves you more interest overall.
 

What should I do if there is a mistake in my foreclosure statement?
Contact your bank immediately and raise a complaint. Provide transaction proof and ask for a corrected statement.

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About the Author

LoansJagat Team

‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.