Money Clarity

RBI banned prepayment charges. Here is what it actually covers.

From 1 January 2026, lenders cannot levy prepayment or foreclosure charges on floating-rate loans granted to individuals for purposes other than business. There is no lock-in period and it applies regardless of where the repayment money comes from. Fixed-rate loans are not covered.

What is covered

The scope is specific, and the specifics are what decide whether it applies to you.

Floating-rate loans sanctioned or renewed on or after 1 January 2026
Loans to individuals for purposes other than business, with or without co-obligants
No minimum holding period before prepayment is allowed
Applies irrespective of the source of the funds used to repay
Where the lender initiates the prepayment, no charge may be levied at all

What is not covered

The gaps matter as much as the coverage, and this is where most confusion sits.

Fixed-rate loans - lenders may still charge prepayment fees on these
Loans sanctioned before 1 January 2026 unless renewed after that date
Business-purpose loans to individuals fall under separate provisions
For MSE and business loans, commercial banks are barred, while Small Finance Banks, Regional Rural Banks and NBFCs face limits tied to loan size - no charges on amounts up to Rs 50 lakh

The disclosure rule that protects you

This provision gets less attention than the ban itself and is arguably more useful day to day.

Prepayment charge rules must be stated in the sanction letter, the loan agreement and the Key Facts Statement
A charge that was not disclosed in those documents cannot be collected
If a lender quotes a foreclosure charge, ask where it appears in your sanction letter
Keep the Key Facts Statement - it is the document that settles disputes

What to do about it

The rule lowers the cost of leaving a badly priced loan, which changes the arithmetic for a lot of borrowers.

Check your loan agreement for whether your rate is fixed or floating - this decides everything
Check the sanction date, and whether the loan has been renewed since
If it is floating and post-January 2026, exiting should cost you nothing in lender charges
The new lender may still charge a processing fee, typically 1 to 2 percent - that cost has not gone away

Common questions

Does the RBI prepayment rule apply to my existing loan?

Only if it is a floating-rate loan sanctioned or renewed on or after 1 January 2026. Loans sanctioned before that date are not covered unless they have been renewed since, and fixed-rate loans are not covered at all.

Can a bank still charge me a foreclosure fee?

On a fixed-rate loan, yes. On a covered floating-rate loan, no. And in every case, a charge that was not disclosed in your sanction letter, loan agreement or Key Facts Statement cannot be collected - so ask to be shown where it appears.

Is there a minimum period before I can prepay?

No. For covered loans the rule specifies no minimum lock-in, and it applies irrespective of the source of the funds used to repay.

The exit door on most floating-rate personal loans is now free. That does not automatically make switching right, but it removes the charge that used to make a marginal case not worth it.

Written by Danish Mirza, founder of Unyfy. 14 years in Indian lending and collections at Standard Chartered, Barclays, Ola Money and Uni Cards.
Last reviewed 2026-09-08.