RBI's No Foreclosure Charges Rule - Simplified for you

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Who Benefits and Who Does Not

Who Benefits:

• Salaried individuals with floating-rate personal loans
• Small business owners with eligible floating-rate loans
• Borrowers from banks, NBFCs, and co-operative banks

Who Might Still Pay Charges:

• Fixed-rate loan borrowers
• Large business loans above 50 lakh
• Certain specialised loan types

When Are Prepayment Charges Banned?

Key Entities Covered

• MSEs: Micro and Small Enterprises

• UCBs: Urban Co-operative Banks

• SFBs: Small Finance Banks

• NBFCs:Non-Banking Financial Companies

When Prepayment Charges Still Apply?

Real-Life Examples

NO CHARGES

• ₹35L home loan (floating) from any bank
• ₹8L personal loan (floating) from NBFC
• ₹40L business loan (floating) from SFB

CHARGES MAY APPLY

• ₹60L+ business loan from SFB
• 5-year fixed-rate education loan

Renewable Loan Types That Can Avoid Foreclosure Charges

1. Floating Rate Personal Loans

All floating-rate loans for personal needs - whether for your home, car, education or other expenses - won't have prepayment penalties if they're either:

• Brand new loans taken after January 1, 2026
• Existing loans that get renewed after this date

2. Floating Rate Business Loans

Small business owners and micro enterprises get relief too. Your floating-rate business loans escape foreclosure charges when:

• The loan amount is within limits
• The loan is either new or renewed after the 2026 deadline

3. Flexible Credit Facilities

For overdrafts, cash credit and demand loans, you can avoid charges by:

• Informing your lender before renewal date
• Clearly stating you want to close the facility

4. Hybrid Loan Products

Even if you have combination loans with both fixed and floating rate periods:

• The floating rate portion qualifies for no charges
• Applies when renewed or converted to floating rate

Loan Types Exempt from Foreclosure Charges

• Fixed Rate Loans: If a fixed rate loan is issued or renewed on or after January 1, 2026, lenders may continue to levy prepayment charges, depending on their internal policies.

• Business Loans: In cases where business loans exceed the prescribed thresholds, certain categories of lenders, such as Tier 1 and Tier 2 Urban Cooperative Banks (UCBs) or NBFCs in the middle layer may impose prepayment charges, even when such loans are renewed.

• Excluded Loan Categories:Loans such as foreign currency borrowings, export finance/credit, and other specified categories are not covered under these provisions and remain outside the scope of prepayment penalty restrictions.

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The Universal Rules for All Borrowerss

The RBI's new circular isn't just about who gets charged; it lays down some powerful, borrower-friendly rules that apply across the board. Here’s what you need to know:

Exceptions: Where These Rules Don’t Apply

It’s important to know that this RBI circular focuses on standard rupee loans. The ban does not apply to the following:

• Foreign Currency Loans: Borrowings in US Dollars, Euros, etc.

• Export Credit: Loans specifically for financing exports.

• Structured Obligations:Complex, custom-built financing deals for large corporations.

Conclusion

Here’s the quick summary of everything we discussed:

Effective January 1, 2026 , the RBI has banned foreclosure and pre-payment charges on most floating-rate loans for:

• All individuals(for personal loans like home, car, personal).

• Individuals and Micro & Small Enterprises (MSEs)(for business purposes) can borrow up to 50 lakh for business purposes through lenders ₹ like Small Finance Banks.

This applies to loans from almost all lenders: banks, NBFCs, and co-operative banks.