Posted by Taking a personal loan feels simple in the beginning: quick approval, money in your account, and the freedom to use it for anything from travel to medical needs. But things get interesting when you want to repay the loan early. That’s when terms like prepayment and foreclosure come into play.
Many borrowers think paying early is always beneficial and free of cost. In reality, lenders apply charges because early repayment reduces the interest they expected to earn from your personal loan interest rate. Understanding these rules helps you avoid surprises and make smarter decisions.
What is part prepayment?
Part prepayment means you pay a portion of the loan before its scheduled end, but you don’t close it fully. Think of it as reducing the loan burden midway. Since interest in a personal loan is calculated on the outstanding principal, lowering the principal reduces future interest.
However, lenders don’t allow this freely at any time because it affects their projected returns. So, part prepayment is helpful, but it follows specific conditions.
When can you make a part payment?
Lenders usually want you to show repayment discipline first. That’s why part payment is allowed only after you have paid 12 Equated Monthly Instalments (EMIs). During the first year, it is not permitted. Even after that, there are limits, you can make a part payment once in a financial year and only twice during the entire loan tenure.
This ensures borrowers don’t keep adjusting the loan every few months, which would disrupt the repayment schedule.
What are the part prepayment charges?
When you make a part payment, usually a 3% charge plus taxes is applied to the amount you pay early. The amount you deposit directly reduces the principal outstanding. Your EMI does not change, but the number of EMIs reduces, meaning your loan finishes earlier.
There are also caps on how much you can prepay:
• After 13–24 EMIs → Up to 20% of Principal Outstanding (POS)
• After 25–36 EMIs → Up to 20% of POS
• After 37–48 EMIs → Up to 25% of POS
• After 48 EMIs → Up to 25% of POS
This structure keeps repayment predictable for both lender and borrower.
What is foreclosure?
Foreclosure means closing the entire personal loan before its original tenure ends. Instead of reducing it bit by bit, you clear everything in one go, i.e., principal plus pending interest. This is common when someone receives a bonus, inheritance, or sells an asset and wants to become debt-free sooner.
Foreclosure charges explained
Like part payment, foreclosure is also allowed only after 12 EMIs. Charges reduce as you move further into the loan tenure:
• 13–24 EMIs paid → 4% of POS
• 25–36 EMIs paid → 3% of POS
• 37–48 EMIs paid → 2% of POS
• After 48 EMIs → No charges
The later you foreclose, the lower the penalty, since the lender has already earned much of the interest.
Ending note
Prepayment and foreclosure can save interest, but only when done at the right time. Always compare the charge you’ll pay now with the interest you’ll save later. A well-timed move can shorten your loan and ease your financial load, without hurting your savings.