Foreclosure Charges on Personal Loan

What are Foreclosure Charges on Personal Loan?

July 14, 2023 • 1309 views
Author: PoonawallaFincorp Category: Personal Loan

A Personal Loan can be really helpful when you are facing financial difficulties. But it is important to know that you will need to make monthly payments to pay back the loan. So, managing your money wisely is essential. However, if you want to stop making these monthly payments, you have the option to do something called ‘foreclosure’ of the Personal Loan. Along with paying foreclosure, there is also a charge levied on it. Let us see what foreclosure charges on a Personal Loan are all about.

What are Foreclosure Charges?

Personal Loan foreclosure means paying off the entire loan amount before the loan term ends. When you choose to foreclose your Personal Loan by paying off the remaining balance, you may also have to pay additional charges imposed by the lender. These Personal Loan foreclosure charges are meant to compensate for the interest that the lender would have earned if you continued making monthly payments.

The specific foreclosure charges on Personal Loan can differ depending on the bank or financial institution where you hold the Personal Loan. Typically, these fees fall between 3% to 7% of the outstanding principal loan amount, including applicable taxes.

Foreclosure charges are usually decided and set when you take out the loan. They are listed in the loan agreement, and it is uncommon for them to change during the loan tenure. However, it is always a good idea to carefully go through the loan agreement to see if any clauses mention the possibility of changes in foreclosure charges.

To ensure you have a clear understanding of the foreclosure charges that may apply to your Personal Loan, carefully go through the terms and conditions stated in your loan agreement. By doing so, you can get a precise idea of the specific charges that might be imposed in your situation. To obtain accurate and reliable information about these foreclosure charges, it is recommended to reach out to your lender or financial institution directly. They will be able to provide you with the most up-to-date and relevant details regarding the foreclosure charges associated with your Personal Loan.

When you have enough funds, you may be considering paying off all your instalments to relieve yourself of the debt burden. However, foreclosing on a loan lowers your credit score. So, you can choose to foreclose your loan only if doing so saves you a significant amount of interest after paying the foreclosure charges. This may be particularly feasible if your lending company does not levy a foreclosure fee.

How to Calculate Foreclosure Charges?

If your lender applies a fixed prepayment penalty approach, you can determine the amount you will need to pay as a penalty by multiplying the remaining loan amount by the foreclosure interest rate and the number of months. Take this simple formula into account while you are calculating the foreclosure charge:

Foreclosure charge = Outstanding Loan Amount * Foreclosure Charges Percentage * Remaining Tenure (in months) / 12

Say, for example, your outstanding loan amount is Rs. 1,00,000, the interest rate is 6% and the number of months is 7, then according to the formula the prepayment penalty would be:

1,00,000 * 0.06 * 7/12 = Rs. 3,500

After calculation, the Personal Loan foreclosure charges would be Rs. 3,500.

The lender could also use a differential interest rate method to determine the prepayment penalty. The interest differential method calculates the difference between the interest rate on the loan and the current market interest rate on a similar loan. For example, if the original interest rate was 7% and the current interest rate is 5%, the difference would be 2%.

We then multiply the difference by the principal amount, so that would be:

1,00,000 * 0.02 = Rs. 2,000

Next, divide the number of remaining months to pay the loan by 12 and multiply by the earlier figure. If the number of remaining months is 10:

2,000 * (10/12) = 1,666

By this method, the foreclosure charge that you will incur is Rs. 1,666.


Foreclosing a loan depends on how good your financial condition is. If you have the funds to pay off your debt early, it will solely be good for you as you will be debt free sooner. Also, availing of a Personal Loan from an NBFC would be better since they have higher loan amounts, flexible repayment tenures, and lower interest rates than other financial institutions.

Frequently Asked Questions

  • Are foreclosure charges applicable for Personal Loans?

Yes, foreclosure charges are applicable for Personal Loans. However, certain NBFCs do give you the freedom to foreclose your Personal Loans without any charge.

  • How to avoid foreclosure charges on Personal Loans?

To prevent incurring Personal Loan foreclosure charges, it is wise to consider taking a loan from an NBFC, as they typically do not include such charges or are considerably low. Alternatively, if you cannot find a loan without any foreclosure charges, opt for a loan with minimal charges. This way, you can minimise the additional fees associated with closing your loan early.

  • Can foreclosure fees be waived?

In India, lenders can waive foreclosure fees on Personal Loans, but it varies depending on the lender's terms and conditions. Some lenders may offer the option to waive these charges in certain situations or for specific loan products. To find out if foreclosure fees can be waived, it is necessary to carefully read and understand the loan agreement. Additionally, it is recommended to discuss with the lender to clarify if they have any provisions for waiving these fees.

  • Which is better prepayment or foreclosure?

Both prepayment and foreclosure are ways to lessen your debt burden and achieve a life without debt. Prepayment allows you to reduce the overall interest you will pay on the loan and shorten the loan duration. On the other hand, foreclosure enables you to completely pay off the entire loan amount. Depending on your financial situation, either option can be chosen.

  • Is loan foreclosure good or bad?

Foreclosing a loan allows you to pay off the outstanding balance sooner, freeing you from EMIs and reducing debt. Additionally, if you avail of a loan from an NBFC, you may incur lower or no foreclosure fees. For these two main reasons, loan foreclosure will be beneficial for you.

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