LoansFinancial Glossary
Prepayment Penalty
Definition
A fee charged by a lender if you repay part or all of the loan before the scheduled end date. RBI prohibits prepayment penalties on floating-rate retail loans (home, car, personal). However, fixed-rate loans and business loans can carry penalties of 2-4% on the prepaid amount.
Why It Matters
Prepayment penalties can make early loan closure expensive. Before taking a fixed-rate loan, check the prepayment penalty clause. If you anticipate paying off the loan early (from bonus, inheritance, or income growth), a floating-rate loan with zero prepayment penalty is almost always the better choice.