Paying a personal loan foreclosure charge is worth it when the interest you would still pay is larger than the charge plus GST. It also has to beat what the cash would earn elsewhere after tax. Early in a loan the answer is usually yes; near the end a 4% charge can cost more than the interest left, and the table below shows the month that happens.

Which loans carry foreclosure charges?

Since 2014 for banks and NBFCs (2012 for bank home loans), RBI rules have barred a foreclosure charge on a floating rate loan taken by an individual for a non-business purpose, whatever the source of the money. Directions issued in 2025 restate it for loans sanctioned or renewed from 1 January 2026, for a full or part payment, with no lock-in. That is why prepaying most home loans is free, as prepay home loan or invest works through.

The higher the loan's rate, the more interest closing it buys back, and a personal loan costs about 10% to 24% a year (2026), set by your credit score and the lender. Most personal loans are fixed-rate, and a fixed-rate loan can carry a prepayment penalty set by the lender. In 2026, lenders that charge for personal loan foreclosure commonly take about 2% to 5% of the amount outstanding plus 18% GST, up to 6% at a few lenders, and some bar foreclosure in the first 12 months. Since 1 October 2024 a retail loan's Key Facts Statement must show the all-in annual rate and list any foreclosure charge.

Is Abhishek's 4% charge worth paying?

Abhishek earns ₹27 lakh CTC, about ₹1,67,100 a month in hand on the structure in CTC vs in hand salary. For his wedding he borrowed ₹8,00,000 at 13% over three years, an EMI of ₹26,955, 16% of his take-home. His 2% processing fee was deducted from the payout and is gone either way, so it plays no part now.

Ten EMIs later, his bonus after tax and the savings he has put by since the wedding come to ₹6,00,000, and his agreement charges 4% of the amount outstanding to close the loan early.

After 10 of 36 EMIs Amount
Still owed ₹6,07,937
26 EMIs left, ₹26,955 each ₹7,00,830
Interest still to come ₹92,893
Charge at 4% ₹24,317
18% GST on the charge ₹4,377
Net saving from closing ₹64,199

So the charge and its GST, about ₹28,700, buy back about ₹92,900 of interest: closing saves about ₹64,200. It needs ₹6,36,631, about ₹36,600 more than that ₹6,00,000.

The rupee saving overstates the gain, because the ₹6,36,631 leaves today while the EMIs it replaces would have been paid over 26 months. Counted that way, closing earns about 8.7% a year on the cash: below the loan's 13% because of the charge, but with no tax and no market risk.

When does the charge eat the saving?

The interest left shrinks faster than the balance, so the same 4% charge weighs more as the loan ages. For Abhishek's loan:

Closed after Still owed 4% charge with GST Interest to come Net Return on the cash
6 EMIs ₹6,87,254 ₹32,438 ₹1,21,396 ₹88,958 about 9.2%
10 EMIs ₹6,07,937 ₹28,694 ₹92,893 ₹64,199 about 8.7%
18 EMIs ₹4,38,669 ₹20,705 ₹46,521 ₹25,816 about 7.0%
24 EMIs ₹3,01,791 ₹14,245 ₹21,669 ₹7,424 about 4.3%
30 EMIs ₹1,55,772 ₹7,352 ₹5,958 ₹1,394 lost below zero

Closed after 29 or more EMIs, the 4% charge costs more than the interest it saves. At a 2% charge, closing after 10 EMIs earns about 10.8% a year; at 6%, about 6.7%, and by month 18 only 4.1%. A loan on a credit card closed early is priced the same way, charge plus GST against the interest left, and personal loan vs loan on credit card compares the two when both close at month six.

Close the personal loan or invest the money?

The emergency fund comes first. His share of the couple's essentials, the EMI included, is ₹70,000 a month, and with two salaried incomes six months is ₹4,20,000, which he holds. Had the wedding budget drawn the fund down, this money would refill it first, the order the annual bonus plan follows. Whatever was left could part-prepay the loan, but his agreement may charge the same 4% on the amount paid.

Closing also lowers his target: without the EMI, essentials fall to ₹43,045 and six months to ₹2,58,270. Taking the extra ₹36,631 from his fund leaves ₹3,83,369, still above it.

The other use is investing. The loan ends in 26 months, too soon for equity, which suits goals seven or more years away. A liquid fund at an assumed 6% a year before tax (2026) keeps about 4.1% in his 30% slab (FY 2026-27, new regime), against the 8.7% closing earns. With a 4% charge, he closes.

Before paying, ask the lender for a foreclosure statement showing the balance, interest to date, the charge and its GST, then get a closure letter and cancel the EMI mandate.

Dhi shows a personal loan's EMI in your cash flow and its balance in your net worth, and answers from your own numbers whether closing it or keeping the cash leaves you better placed. Dhi earns no commissions from any lender, so closing or keeping the cash makes no difference to it, and nudges when your emergency fund needs attention.

Frequently asked questions

A loan repaid in full is reported as closed, and its record of on-time EMIs stays on your credit report; only a settlement for less than the full dues is reported as settled and lowers the score. Since 1 July 2026 lenders report to credit bureaus four times a month, so check your report a few weeks after closing and ask the lender to correct it if the loan still shows as open.
A part-prepayment saves interest at the loan's rate on the amount paid and leaves more cash in hand, which helps when your emergency fund is short. On a fixed-rate loan the agreement may charge the same percentage on a part-prepayment as on closing, or allow one only after a lock-in, so price both from the agreement before choosing.
For loans sanctioned from 1 October 2024, a lender cannot levy a fee that is not shown in the Key Facts Statement (KFS) without your explicit consent, and for loans sanctioned from 1 January 2026 RBI's directions allow a prepayment charge only if the sanction letter, loan agreement and Key Facts Statement disclose it. Compare the foreclosure statement with your KFS and complain to the lender in writing; if it does not reply within 30 days or its reply does not fix the charge, you can complain to the RBI Ombudsman at cms.rbi.org.in under the Integrated Ombudsman Scheme, 2026.

This is general information for salaried individuals in India, not personalised financial advice.