From 1st January 2026, the Reserve Bank of India (RBI) has banned prepayment penalties on most floating-rate loans for individuals and Micro & Small Enterprises (MSEs), covering home, personal, education, and business loans, allowing borrowers to repay early without extra fees, promoting fairer lending and borrower flexibility. This directive applies to all major lenders, including banks and NBFCs, for loans sanctioned or renewed from that date, ensuring transparency in sanction letters. Prepayment charges may still apply to fixed-rate loans, as the RBI rule specifically targets floating rates.
Under the new rules, several lenders cannot charge any pre-payment fee on certain loans. These include small finance banks, regional rural banks, tier-3 primary urban cooperative banks, state cooperative banks, central cooperative banks, and middle-layer NBFCs. If these lenders give business loans to individuals or MSEs of up to ₹50 lakh, no pre-payment charges can be applied. This applies whether the loan has a co-borrower or not.
What This Means for Borrowers:
- No More Penalties: You won’t face extra charges for prepaying or foreclosing your floating-rate loans, whether partially or fully.
- Broad Coverage: This applies to home loans, personal loans, education loans, and working capital/overdrafts for individuals and MSEs.
- Applies to New Loans: The rule is effective for loans sanctioned/renewed on or after January 1, 2026.
- Transparency Required: Lenders must clearly state no prepayment charges in the loan’s Key Facts Statement (KFS) and sanction letter.
The RBI said these directions are meant to solve customer complaints. Many borrowers, especially MSEs, have faced problems due to unclear rules and restrictive clauses in loan agreements. The new guidelines aim to bring uniformity and transparency in how pre-payment charges are handled. They apply to all commercial banks (except payment banks), cooperative banks, NBFCs, and all-India financial institutions.
However, the RBI clarified that the rules may vary depending on the type of lender and the loan amount sanctioned. The directions also say that all details about pre-payment charges must be clearly mentioned. These details should be included in the sanction letter, the loan agreement, and the key facts statement, wherever applicable.
Lenders are not allowed to add new charges later if they were not disclosed earlier. They also cannot charge fees retrospectively or re-impose charges that were waived earlier at the time of pre-payment. In addition, borrowers cannot be charged a pre-payment fee if they choose not to renew a cash credit or overdraft facility and inform the lender in advance.
For loans with both fixed and floating rates, the rule will depend on the interest rate at the time of pre-payment. If the loan is on a floating rate at that time, the new directions will apply.
