7 Key Things to Consider Before Pre-Closing Personal Loan

Personal loan pre-closure refers to repaying your entire outstanding loan balance before the end of its tenure.

Many salaried and self-employed individuals choose to prepay personal loans to save on interest costs, reduce debt burden, or improve their credit score.

While it may seem financially smart to close a personal loan early, there are important factors to consider such as pre-closure charges, loan agreement terms, and the impact on your savings.

Not every lender offers the same terms, and prepayment penalties can sometimes outweigh the benefits.

Before making a decision, it's crucial to understand the pros and cons of early loan repayment. Evaluating these aspects will help you determine whether personal loan foreclosure is the right move for your financial situation in 2025.

What Is Personal Loan Pre-Closure and How Does It Work?

Personal loan pre-closure means repaying the entire outstanding loan amount in one go, before the end of the loan tenure. This is different from part-payment, where you pay a portion of the loan principal to reduce your EMI or loan term but continue with regular payments.

Understanding this distinction is important. While loan prepayment lowers your interest burden, full pre-closure completely ends your loan obligation.

However, not all lenders allow immediate pre-closure. Most require that you complete a minimum number of EMIs (usually 6 to 12 months) before you're eligible to pre-close your personal loan.

Check your loan agreement for specific pre-closure terms, including waiting periods and prepayment clauses. Knowing these rules in advance helps you plan your repayment strategy more effectively and avoid any unexpected charges or rejections when you're ready to close the loan early.

7 Key Things to Consider Before Pre-Closing Your Personal Loan

Before you move forward with personal loan pre-closure, it's essential to assess several important factors to avoid unexpected costs and ensure financial benefits.

1. Pre-Closure Charges:

In India, as per the Supreme Court's ruling and RBI guidelines, lenders cannot charge pre-closure penalties on floating-rate personal loans sanctioned for individual (non-business) purposes. 

This means that if you have a floating-rate personal loan, the pre-closure charges are typically nil or zero. However, fixed-rate loans may still incur pre-closure fees.

Always verify your loan agreement, as terms can vary, and consult with your lender for specific details.

According to the Supreme Court's interpretation of Reserve Bank of India (RBI) guidelines, banks and Non-Banking Financial Companies (NBFCs) are prohibited from charging pre-closure or prepayment penalties on floating rate term loans sanctioned to individual borrowers for purposes other than business. This includes personal loans, home loans, and other similar loans.

In the case of Janak Shantilal Patel vs. M/S Aditya Birla Finance Limited (2022), the Gujarat High Court emphasized that NBFCs must not levy foreclosure charges on floating rate term loans extended to individual borrowers for non-business purposes, in line with RBI's consumer protection measures .

Similarly, in Yogam Naidu vs. Bank of Baroda (2022), the court ruled that the bank could not charge prepayment penalties on a floating rate loan sanctioned for personal use, as per RBI's directives .

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2. Minimum EMI Requirement:

Lenders often require that you pay a fixed number of EMIs usually 6 to 12 before allowing loan foreclosure.

3. Effect on Savings:

Don’t deplete your emergency fund to pre-close the loan. Ensure you retain financial stability.

4. Credit Score Impact:

 Early loan closure may improve your credit score, but only if the lender reports it accurately to credit bureaus.

5. Tax Benefits:

If your personal loan was used for home renovation or education, closing it early might affect your tax deductions.

6. Required Documentation:

Secure a No Objection Certificate (NOC) and loan closure certificate from your lender.

8. Alternative Options: 

Consider part-prepayment or a balance transfer before opting for full closure.

How Pre-Closing Your Personal Loan Affects Your Credit Score

Pre-closing your personal loan can have a significant impact on your credit score. On the positive side, paying off your loan early reduces your outstanding debt, which can improve your credit utilization ratio and demonstrate responsible financial behavior. As a result, it could positively affect your creditworthiness in the long run.

However, early loan closure might slightly affect your credit mix one of the key factors influencing your credit score.

A diverse credit mix, including credit cards, personal loans, and other types of credit, is generally seen as favorable by credit scoring models.

If your personal loan was your only installment loan, closing it early might reduce your mix, which could have a minor negative effect on your credit score.

Ensure that your lender reports the loan closure accurately to credit bureaus, as discrepancies in reporting can lead to errors in your credit report and affect your credit score.

FAQ for Pre-Closing Your Personal Loan

1. What is pre-closure of a personal loan?

Pre-closure of a personal loan is when you pay off the entire outstanding balance of the loan before the end of its agreed tenure, closing the loan account early.

2. Can I pre-close my personal loan anytime?

Not always. Many lenders require that you pay a minimum number of EMIs (usually 6–12 months) before you're eligible to pre-close your personal loan.

3. Are there any charges for pre-closing a personal loan?

For floating-rate loans, RBI guidelines and the Supreme Court ruling state that pre-closure charges are generally nil. However, fixed-rate loans may still attract fees.

4. Will pre-closing my personal loan affect my credit score?

Pre-closing your loan can improve your credit score by reducing outstanding debt. However, it may slightly lower your credit mix, affecting your score in the short term.

5. How do I ensure my loan is closed properly?

After pre-closing your loan, make sure the lender provides a No Objection Certificate (NOC) and an updated loan closure certificate. Also, verify that your credit report reflects the closure.

6. Is it better to pre-close a personal loan or make part-payments?

Part-payment reduces your principal amount without completely closing the loan. It may be a better option if you want to save on interest but still maintain liquidity.

7. What alternatives exist to pre-closing a personal loan?

Alternatives include balance transfers (to a loan with a lower interest rate) or refinancing. These options may help you reduce interest payments without closing the loan.