What are Personal Loan Foreclosure Charges?

Posted on Thursday, February 27th, 2025 | By IndusInd Bank

When you secure a personal loan, you commit to repaying it in fixed instalments over a chosen tenure. However, your financial situation may change, and you might decide to repay the loan amount earlier than planned. This process is called foreclosure or prepayment. While this can be a positive thing, as it will reduce your debt burden faster, you should also be aware of the charges you may incur in the process. 

If you are planning to prepay your instant personal loan, you may have to deal with foreclosure or prepayment charges. However, some banks may also offer a personal loan with zero foreclosure charges,which can provide financial relief to borrowers. Regardless, it is crucial to be aware of personal loan foreclosure charges to avoid unpleasant surprises. 

What are Foreclosure Charges in Personal Loans?

• Foreclosure charges are fees that lenders impose when you repay the outstanding loan amount before the end of the agreed tenure. Personal loan foreclosure allows you to close the loan early. A major benefit of this is that it reduces the total interest you would otherwise pay.  

• Foreclosure fees can be a certain percentage of the outstanding loan amount or even a fixed amount. It varies from one bank to another.  

For example:  

If your outstanding loan amount is ₹1,00,000 and the foreclosure charge is 3%, you would pay ₹3,000 as the foreclosure fee.  

• Some lenders might offer a personal loan with no foreclosure charges. This can allow borrowers to close their loans early without additional costs. However, it is crucial to check if there are any caveats related to the exemption of charges before proceeding.

• When paying off your loan early, you might come across two types of charges – prepayment charges and foreclosure charges. Both are not the same, as we will learn. 

Are Foreclosure Charges the Same as Prepayment Charges?

Foreclosure charges and prepayment charges have subtle differences.

1. Foreclosure

This refers to repaying the entire outstanding loan amount in one go and closing the loan before the tenure ends. Foreclosure charges apply when you pay off the loan in full before its maturity date.  

2. Prepayment

It involves paying a part of the loan amount ahead of schedule. This does not mean you are closing the loan completely. Some banks may also allow partial prepayments up to a certain percentage of the loan amount.  

Both foreclosure and prepayment can help reduce the overall interest burden. Along with a zero foreclosure charges personal loan, you can also opt for a personal loan with minimal prepayment penalties. This can ensure better savings in the long run.  

Should You Prepay the Personal Loan Even with Foreclosure Charges? What to Consider?

Before you prepay or foreclose the loan, evaluate the following factors to make the right decision:  

1. Foreclosure Charges vs Interest Savings

Compare the foreclosure charges with the interest you will be saving by closing the loan early. If the interest savings are more than the charges, foreclosure may be a wise decision.  

Example: 

If your interest savings amount to ₹20,000, and the foreclosure charge is ₹5,000, you still save ₹15,000 by foreclosing the loan.  

2. Personal Loan Tenure

Foreclosing a loan in the initial years of the tenure saves more on interest. This is because a major portion of EMIs during this period go toward interest repayment. In the later years, the savings may be minimal.  

You can use tools like the personal loan EMI calculator or review the amortisation schedule shared by the bank to better understand your repayment structure. 

3. Alternative Investments 

Check if you can invest the money elsewhere. Compare the returns to the interest savings from loan foreclosure. If the former is higher, consider continuing the loan.  

4. Financial Stability

Using all your savings to close the loan may leave you financially vulnerable. Hence, ensure you have sufficient funds for emergencies too.

By analysing the above factors, you can decide whether foreclosure is the right choice. 

Also Read: Is Opting for Pre-Closure of a Personal Loan the Right Option?

Conclusion

Foreclosure charges are fees that the bank levies when you repay your personal loan before the tenure ends. While foreclosure helps save on interest, you need to weigh the charges against potential savings. When you can opt for a personal loan with zero foreclosure charges, it is important to ensure you are not compromising on other personal loan benefits (like competitive interest rates) for the same. 

IndusInd Bank provides a host of benefits for borrowers and potential applicants, such as a 100% online application process with instant approvals and disbursals, competitive interest rates, no collateral requirements, flexible loan tenures, and more.

Apply now to start benefitting! 

Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.