What is a Prepayment Penalty

Read to learn about personal loan prepayment penalty details and why lenders charge it.
Part-prepay your loan
5 min read
20 Mar 2023

Personal loan bridges the gap when other financial options have been exhausted. An individual can use a personal loan to cover their immediate and unexpected expenses. And choose to prepay the loan when you have extra funds. However, there are certain penalties levied while prepaying a personal loan. Therefore, it’s recommended to read the entire list of fees and charges in detail before going ahead.

Read on to understand more about the prepayment penalty and why lenders charge for it when borrowers opt for a prepayment facility.

What is a prepayment penalty?

A prepayment penalty is a charge that lenders levy if you pay off a part of your personal loan ahead of schedule. For an instance, an individual has taken a personal loan and has been paying the EMIs for the last 12 months. Now, he has decided to pay off a part of his loan. In such a case, he’ll have to pay a certain percentage as a penalty to the lender. Usually, the prepayment penalty on a personal loan starts after a lock-in period that is decided by the lender. The part-prepayment fee varies across different lenders. Bajaj Finserv levies a fee of 4.72% (inclusive of applicable taxes) for prepayment of a personal loan.

Also, foreclosure charges will be imposed if you prepay the entire outstanding loan amount.

Why do lenders levy prepayment charges?

A personal loan comes with a specific tenure and the lenders expect a certain interest as their profit on the loan amount. And, when an individual chooses to repay that loan beforehand, they earn a lower interest amount. To cover for the loss of income, lenders usually charge a penalty for paying a personal loan ahead of time.

Note that the prepaid loan amount goes towards paying off the principal amount only. However, with the reduced principal, a borrower qualifies for more affordable EMIs. Alternatively, if an individual wishes to reduce the interest payable, he/ she can also choose to shorten the loan tenure by keeping the EMIs intact.

Read more about our interest rate and charges before applying for the loan.



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Frequently asked questions

Is there a prepayment penalty on a personal loan?

Prepayment penalties on personal loans vary by lender. Some lenders charge a fee for early repayment, while others may allow prepayment without penalties.

Is it a good idea to prepay a personal loan?

Prepaying a personal loan can be beneficial as it reduces interest costs and shortens the repayment period, potentially saving money in the long run, however, it can impact your monthly budget. Hence we advise you to consider your ongoing or expected expenses before making any decision.

Does prepayment affect CIBIL Score?

Prepayment typically doesn't directly affect CIBIL Score. However, closing an account early may impact the credit mix and length of credit history, indirectly influencing the score.

Why do banks charge prepayment fees?

Banks charge prepayment fees to compensate for the interest income they would have earned if the loan continued as per the original repayment schedule.

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