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No Penalty charge on pre-payment of loans – RBI

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Do you want to pre-pay your loan, but worried about the 1-2% pre-payment penalty charged by bank ?

Now you should not worry about that as RBI has directed banks not to levy any penalty on individual borrowers for pre-paying floating loans.

RBI said in a notification –   “it is advised that banks will not be permitted to charge foreclosure charges or pre-payment penalties on all floating rate term loans sanctioned to individual borrowers, with immediate effect,”

RBI Circular  –  RBI/2013-14/582    DBOD. Dir.BC.No.110/13.03.00/2013-14

http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8868&Mode=0

Some banks are charging pre-payment penalty of up to 2% of the outstanding loans.

Two years ago, RBI had barred banks from levying foreclosure charges or pre-payment penalties on home loans on floating interest rate basis. Read RBI Circular  –  RBI/2011-12/589    DBOD. No. Dir. BC.107/13.03.00/2011-12

Now, even for other loan products include housing, corporate, vehicle and personal loans, banks are not permitted to charge pre-payment penalty.

It is believed that removal of foreclosure charges or prepayment penalty on loans will lead to reduction in the discrimination between existing and new borrowers and the competition among banks will result in finer pricing of loans with the floating rate.

 

In  a recent policy statement in April 2014, RBI has proposed to frame comprehensive consumer protection regulations based on domestic experience and global best practices. As part of this, RBI has announced various consumer-friendly guidelines

–  No Penalty charges if minimum balance not kept in dormant bank account

–  Calculation of Interest rate paid on savings banks on the daily minimum balance instead of the earlier practice of paying interest on quarterly balances.

–  10-year-olds can open and operate bank account alone

–   No penalty on pre-payment of loans – ( Housing Loan, Personal Loan, Auto Loan etc)

If you have any queries related to this article or any other personal finance query ( Investment, Taxation etc), please comment below

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110 comments

  1. Dear Vivek,

    Has RBI already come out with any notification instructing banks not to levy foreclosure charges ?

    If yes, would be very helpful for millions of Indian borrowers if you can quote the notification number.

    Rgds
    Edgar

  2. hi,
    I have told this to hdfc.but they told that they have not received any circular regarding rbi new norms.
    so they charged me the penaly for my car loan.

    what to do with this?please give me some advice regading this.

    • Hi Urmi,

      As per circular link provided above, banks are not allowed to charge pre-payment penalty for FLOATING rate loan only.

      Normally car loan is fixed rate loan, so they can charge penalty.

  3. Dear sir,

    I have housing loan on 11% fixed interest, and I want to take over to other bank, fore closing charges applicable for this.
    Please clarify the same

    • There is no prepayment penalty on floating rate loans. But for fixed rate loans, penalty can be charged.
      Which bank you have loan from ??

  4. Dear sir,

    I have a loan at PNBHFL, need to take over to canarabank

  5. Greetings everyone
    RBI has also advised that NBFCs shall not charge foreclosure charges/ pre-payment penalties on all floating rate term loans sanctioned to individual borrowers.
    Via
    RBI/2014-15/121
    DNBS(PD).CC.No.399/03.10.42 /2014-15
    Dated July 14, 2014

  6. Is this applicable for Personal Loan? i odnt think so as HDFC is not charging 4-5% pre payement charges even now.
    Why not RBI states in simple words so layman can understand.

    • Pre-payment penalty should not be charged for “Floating rate loans”.
      Personal loan is fixed rate loan and bank can charge pre-payment penalty.

  7. Dear Sir
    I have car loan from hdfc bank and when i visited to them for pre clousre they told me you will be charged-5.2% as preclousre charges of outstanding principle.
    Pls. let me know as per RBI rule for is pre clousre charges applicable or not and how can it be waived off….

    Regards
    Rajesh

    • Hi Rajesh,

      The waiver of pre-payment penalty is for floating rate products only. So as the car loan is fixed interest, the bank may charge pre-payment penalty.

  8. Dear Sir I have been planning to take car loan with mahindra Finance according to them they are saying that for preclusure of loan they are Charging 3percent it seems, I am confused with rbi guidelines so please tell me about this preclosure. Of loans

    • pre-payment penalties were not charged only for floating rate loans. as car loans / personal loans are fixed rate loans, this rule doesnot apply.

      • But above it is written that ”
        no per payment charges on personal loans as well by wealth18.com.

        Please suggest as it is now double statement.

        • Pre-payment charges are not applicable only for floating rate loans. As personal loan are fixed rate, banks can charge pre-payment penalty.

  9. Hi Vivek,

    I was running a home loam from a NBFC, and closed it in year 2013. they have charged the foreclosure charges. I am claiming for the refund of that, however they are saying that we are not a home finance company, so we can charge the prepayment charges and they are saying that regarding home loan, NBFCs can charge the foreclosure charges, However Banks or HFCs can not charge. It seems unjustified. Request you to kindly help me on this and confirm the point on which I can force them to refund the foreclosure charges they have charged to me.

  10. I have a Loan against property in Indiabulls in my Company’s name and myself along with 3 brothers stand as a co applicant and guarantors. While requesting for pre closure I am asked to pay 5.35% as charges. Is it legal ????

    • Is this floating rate loan. RBI has directed banks not to levy any penalty on individual borrowers for pre-paying floating loans

  11. dear sir,
    i hame corporate loan at sbi,i want to takover by bank of baroda,but sib charge 2.5% pre payment <so pls tell me watch can i do,

    • Hi Anup,

      When you say, corporate loan, what kind of loan it is ? whether the interest is fixed or floating ?

  12. MY HOME LOAN ACCOUNT GOT CLOSED ON 05/05/2014 AND PRE PAYMENT CHARGES WERE TAKEN WERE THEY APPLICABLE ON THAT DAY

  13. Dear Sir,
    With reference to my knowledge Banks can’t Charge any foreclosure charge after 24 Months of the loan as per new RBI Norms (For car Loan). With that interest today I went to ICICI Bank & they said Ill need to pay 5%+ S.T for foreclosure of my car loan. Please help is there any such rule or its only on home loan. My Loan was taken in the year 2011.So do i need to Pay the charge or i can quit without paying the charges? If I can quit without foreclosure charges? suggest me what should i do, as banks is very strict on not waiving it off.

    • Bank cannot charge the pre-payment penalty only in case of FLOATING rate loan.

      If your car loan is fixed rate loan, they can charge pre-payment penalty.

  14. I taken lap loan from India bull on this base of sole proprietors
    please tell us about foreclosure is applicable or not on urgent bases
    they are charges About 5.70% foreclosure near about 3 lacs
    please help us

    • Hi Naresh,
      Is this floating rate loan?
      RBI has directed banks not to levy any penalty on individual borrowers for pre-paying floating loans

      • Yes sir loan on floating rate
        but India bull people replay that They include my firm(Sole Prop. firm) a co-applicant
        So foreclosure are applicable.
        please advice me

        • Hi Naresh, The circular says that pre payment penalty is not allowed for individual borrowers. So if the firm is applicant is firm, they may charge penalty.

      • Hi Vivek Sir,

        I have taken a Car loan from TVS Credit with the rate of interest 9.87% for 194250. Initially they didn’t inform me that it’s a flat interest rate. I am paying EMI as 6994/- against this loan. However they are calculating the interest for the whole amount such as 194250 and they are not reducing the principal amount every month which I am paying.

        Hence I decided to close this loan, however they were telling me like preclosure charges as 5%. It’s very high. is there any way to proceed this case legally? or help me out with the laws to negotiate on this.

        I have also calculated for the amount i paid so far, it was litterally 2% interest on monthly basis.

        • There was no official intimation regarding loan and sanction letter too. some how i found through aggrement number in the TVS Credit Site.

        • Hi Venkat, There must be any approval letter for the loan. Normally EMI has both Interest & principal. Typically the principal amount is less initially.

          They can charge pre payment penalty in case the loan in fixed interest rate loan.

          What is the duration of loan?

  15. I want to foreclose my personal loan but hdfc bank wants foreclosure charges from me. Please suggest what can I do..

  16. What percentage of loans offered by banks are int he Floating Interest Category. This rule is only an eyewash if this statistics can be made available. Private banks say no pre-payment penalty even for fixed rate loans orally when loan is offered but will not give in writing. They will say it will be available after three months EMI or 6 moths EMI. That too no records. Finally no transparency and we end up paying as demanded. This trend is more visible in banks like ICICI, HDFC and Kotak.

    • Hi Divakaran, It depends on type of loans – in some loans part prepayment is allowed without penalty. If the bank is misselling, then you should complain to the banking ombudsman.

  17. dear sir
    is their any rule for bank to how much % bank charg for foreclosure

  18. Mr Vivek,

    I have taken Car loan from Kotak Mahindra Bank from 8 months back. I have another 3.86 Lakhs balance. If I pay 2.5 Lakhs now, Will they charge pre-closing charges for that. How will they calculate the interest for the remaining balance. Please advice me.

    Thanks

    Bharathi

  19. dear sir ,
    i have a lap loan from magma finance on floating rate which is in my name and co applicant is my company which is proprietorship concern
    am i liable for foreclosure charges , the company is claiming 4 % toward closure charges ,
    kindly please help in this regard

    • Hi Amit, Bank is not allowed to charge the prepayment penalty in case of floating loan only for INDIVIDUAL customers. You should discuss this further with your loan provider.

  20. Hi,

    Recently I had taken a personal loan from leading private Bank and as per their terms I can not repay my Personal loan within in 1 year. Now i got bonus from my company and i would like close my part amount around 50% of loan amount taken within 1 year.

    But, Now there are telling me that i can not repay the loan amount with in 1 year. Is their any RBI guideline where the borrower can repay the loan within 1 year and without charges.

    Please provide your comments.

    • Hi Sumit, Bank is not allowed to charge the prepayment penalty in case of floating loan only. But as personal loan is fixed rate they can charge penalty.

  21. dear sir,i wants to prepay my auto loan hired from HDFC bank on fixed rate . but when i aproached the bank they asked me to pay a penalty of a whooping 5.7 % on the outstanding amount .
    kindly suggest me what should i do . is the penalty of 5.7 % o.k .

    • Hi Shobha, Bank is not allowed to charge the prepayment penalty in case of floating loan only. But as the auto loan is fixed rate loan, they can charge such penalty.

  22. i took a car loan from hdfc bank on 13.05.13.now i want to pre close my loan a/c but hdfc bank charge me 4.5 % precloser charge.is any guideline of rbi that for closer charge not to be taken?please advice me.
    thank you

    • Hi Shalini, Bank is not allowed to charge the prepayment penalty in case of floating loan only. As car loan is fixed rate loan, they can charge pre-payment penalty.

  23. Hi
    I’m taking loan from Axis bank but I will do part payment next year so I can do whatever I want der is any interest charges or taxes or any prob I have to face ? Plz help me I’m just 27age

    • Hi , Which loan is this? Whether the interest is fixed or floating? Bank is not allowed to charge the prepayment penalty in case of floating loan only

  24. Dear Vivek,

    I obtained ICICI personal loan in the year 2013. Now I want to repay the entire amount. However, Bank is insisting for 2.5% foreclosure charge. Can you please help me as to how Can I get waived off this foreclosure charges.

    Thanks,

    Sagar

  25. Hi, I have a loan from HDFC bank and my car was stolen last year in september, now my loan is about to settle and bank is charging around 4.5% of principal, i already told them about my case that its a loss for me and F.I.R has also been submitted but they are still charging for it and saying that they can wave only 1%. Please suggest next step as i’m going through financial loss.

  26. Hi Vivek,

    I have taken 2 personal loans from HDFC, and now i want to foreclose them as early as possible. But the bank is saying that there would foreclosure charges applicable at the rate of 3% to 4% on my Principle outstanding amount. Please advice what can be done. The loan is currently running at 14% floating rate.

    • Hi Anurag, How do you know that loan is on floating rate. Normally all personal loan is on fixed rate? Can you please let me know.

  27. Hi..

    Is there any penalty limit set by RBI for pre-closure of fixed rate car loan? Can a NBFC charge 20% of pre-closure penalty for fixe rate car loan? Where can we appeal against it?

    Regards,
    Ambarish

    • Hi Ambarish, There is no such limit. But normally pre-closure penalty is 1-5% . Charging penalty of 20% is very surprising. Which NBFC is this?

  28. During taking a home loan, will the banks write on agreement letter that no penalty will be levied on the prepayment of home loan.

  29. Sir,
    We brought our corporate term loan in floating rate in kvb
    Now we want to close the loan but they ask to.pay pre closer charge
    Now what to do????

  30. I have taken lap loan on 30-04-2015 from HDB financial services ltd. on the basis of sole proprietors on fixed rate of interest for first three years thereafter floating interest rate.
    please tell me urgently about foreclosure is applicable or not, as i have to pay the amount on 31-03-2016…
    they are charging About 4.58% foreclosure near about 3 lacs
    please help me 9855603663

  31. Hii
    I have taken a lap loan from hdb bank in the year 2015. They have fixed me interest first 36 months (fixed rate) after that floating interest rate. Now i want to repay the whole amount. However the bank is insisting for 4.58% forecloser charges. Can u please help me how i waived off by forecloser charges..

    Thanks
    Aviral

  32. sir
    I took personal loan from Kotak Mahindra bank in 2014 in floating rates. Now I want to pre pay the loan but they are charging a huge amount from me in different heads. The amount is nearly equals to the amount of total EMI payment. what should I do?

  33. SRIVALSAN MENON

    Sir, Please clarify on “individual borrowers”. By definition this would include sole proprietors, sole proprietorships firms etc and definitely exclude Companies, Partnerships, AoPs, HUFs etc. Some NBFCs are purposefully making Sole Proprietorship Firms as applicants to seemingly circumvent this directive even though this is not valid as “individuals” would technically include sole proprietors and sole proprietorships. NBFCs are following this as a make-believe arrangement to give an impression to borrowers that this would attract charges for foreclosure.

    • Hi Srivalsan, You are right, some NBFC are treating Sole Proprietorship Firms as non -individual borrowers and levying any pre-penalty charges. Unfortunately, there is no clear clarification by RBI on this.

  34. Sir, my home loan is on floating rate however hdfc is charging me pre closure charges if i am taking over this loan to other bank. What they say is, if you are trying to close from your own hard earned money then they wouldnt charge. how to deal with this?

    thanks

    • Hi Nagarjun, You should contact again the respective HDFC manager.. They should not be charging the pre-closure charges in case of floating rate home loan.

  35. Hi sir,
    I have taken a lap from l&t finance on floating rate… now i wish to transfer it in another bank on less interest rate…
    As per rbi i dnt have to pay any foreclosure… but they are asking me foreclosure charges… plz guide

    • Hi Sujeet, Have you taken the loan in your name (as Individual) or in Business name? As some companies are levying pre-payment charges if the loan is taken by business entity (and not individual).

  36. Hi Sir,

    I have taken Credit card loan on floating interest rate in 2014 and have Fore closure just 2 days back ..But ICICI bank charged me 3% Fore closure charges + Service tax …Is any way to retrieve my money back.

    Sir,Is there any RBI control to this private banks to stop by looting common people…?

    • Hi Bupesh, fore closure charges are not applicable for the floating interest rate loans. How do you know that the credit card loan was a floating rate loan and not a fixed rate loan?

      As far as I know, Personal Loan on Credit Card (PLCC) by ICICI Bank has fixed interest rate and therefore they can change foreclosure penalty.

      • Sir, I have been told while borrowing or opting loan & i have being seeing the regular statements in that reducing interest amount according to the Principal amount….

        • Sir

          Iam not able to understand each bank has different interest rates on Personal loan & other..etc why there is no control by RBI on this..

          • The banks are allowed to set their own rate based on the risk taking ability. RBI do not control the loan rates.

        • Hi Bupesh, That’s not floating rate. that’s because you repay certain portion of principal every month and that why the interest for next month is reduced.
          Personal loans have fixed interest rates for e.g. 16%. Floating rates will say Base rate +/- some percentage.

  37. Hi Sir, I have raised a home loan from HDFC Ltd. on variable rate of interest . Now , I am in process of takeover of my housing loan from HDFC to PNB . Will I be charged any prepayment penalty as it is a case of take over .
    Waiting eagerly for your reply .

  38. Hi vivek,
    I took a personal loan from Bajaj Finance.As per the terms of the agreement signed NO foreclosure charges will apply.
    Now I wanted to foreclose my loan and they have informed that they will levy 4% foreclosure charges .They informed that not withstanding the agreement they have the right to unilaterally alter the terms and levy foreclosure charges.
    Is their action legally tenable.
    What if I pay them the outstanding balance and refuse to pay the foreclosure charges.
    Thanks

  39. Dr. Subhash Gupta

    Kindly intimate whether the foreclosure charges is applicable on business loan in individual case.
    kindly intimate whether the foreclosure charges is applicable in case of BL / PL sanctioned in name of Pvt. Ltd. company.

    • As per notification, banks are not permitted to charge foreclosure charges or pre-payment penalties on all floating rate term loans sanctioned to individual borrowers. So if the loan is in individual name and floating rate, then pre-payment penalty is not permitted.

  40. I have checked with HDFC bank to foreclose my personal loan and they asking for 2.3% prepayment charges on outstanding principal amount. Could you please advice what to do in this case ?

  41. SIR I GET THE CAR LOAN IN JAN 2015 AND NOW IN JUNE 2016 I WANT TO CLOSE THE LOAN PLEASE CONFIRM ME ABOUT THE FORE CLOSURE CHARGE.

  42. mohammed ejazul haque

    Hi,

    i have taken a personal loan from HDFC BANK 2years back. Now when i am going to close my loan they are asking for forecloser amount has to be paid. i have gone through RBI Clause it has mentioned that no bank has to charge forecloser charges. so please suggest me what to do

    • The RBI circular is only applicable for floating rate loan and not the fixed rate loan. Personal loan is fixed rate loan and the bank can charge pre payment penalty.

  43. Hi Sir,

    If RBI rule says that borrower has to pay 5% pre-payment/forclose for fixed loan (Car loan) then why are they charging me additional Service tax while forclose, can you guide me whether i should pay them service tax or not.

    Regards,
    Sunit Lele

  44. HELLO SIR,
    I HAVE TAKEN CREDIT LIMIT FROM INDUSIND BANK ON 2014 NOW I AM SHIFTING TO HDFC BANK BUT INDISIND BANK IS ASKING FOR FORCLOSURE CHARGES 4% PLEASE SUGGEST SOMETHING

    • Hi Karun, Which loan is this? Whether the interest is fixed or floating? Bank is not allowed to charge the prepayment penalty in case of floating loan only

  45. Sir I have car loan with chola mandalam it is already 12 month old I have paid regular
    Now I want to close it but they chargeing me 4% to 6% forcloser it is right or wrong I don’t know can you please check RBI guidelines and give a good sagetion

    • Hi Surendra, if your car loan is fixed interest rate loan, then bank can charge pre payment penalty. Only for floating rate loan, the pre -payment charge is not applicable.

  46. BALKRISHNA K PATIL

    i have read all conversations above… from that i realize RBI gives relaxation to bank only not for customers by including their terms like ( floating interest , fixed interest )… i have also facing same problem of foreclosing of car loan BY HDFC bank charge me 7 % on my remaining principal amount.. but just by that single term called (floating) and (fixed) not a single RBI GUIDLINE IS HELPFULL IN MY PROBLEMS ALSO THAT WE ALL ARE FACING,,AND FROM JUNE 2014 NO BANK IS WORK UNDER FLOATING RATE TERM… JUST BECAUSE THEY PLAYING WITH US .. AND CHARGE TO US AS THEY WANT..
    IT IS HAPPEN BECAUSE WE CAN BLINDLY SIGN THE AGGREMENT OF BANKS WHILE PURCHASING ANY TYPE OF LOAN

    • Hi, Traditionally all the retails loans (personal, Car etc) are fixed rate interest loans and bank can charge pre payment penalty on that.

      Only House loans were popular as fixed and floating rate – so prepayment penalty is not allowed in floating rate loan.

  47. Hi,
    Is there any guidelines for the %age that a Bank can charge for pre closure of fixed loan or they have a free hand in deciding the %age,

    • Hi Deepak, They are free to decide the charge, but that needs to be told upfront at the time of loan. But many people don’t care about that initially.

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