Paying off a loan early will soon come without a penalty. From January 1, banks and non-banking finance companies (NBFCs) will not be allowed to levy pre-payment charges on floating rate loans taken by individuals for non-business purposes and by individuals and micro and small enterprises (MSEs) for business needs.
The new directions, issued by the Reserve Bank of India, are aimed at removing hidden costs and restrictive clauses that have long troubled borrowers, especially small businesses.
Under the revised framework, borrowers can prepay floating rate loans without worrying about extra charges. The relief applies to loans taken by individuals for personal use and to individuals and MSEs for business purposes, marking a significant shift in how lenders handle early repayments.
The RBI has also laid down a clear threshold. Small finance banks, regional rural banks, tier 3 primary (urban) cooperative banks, state cooperative banks, central cooperative banks and NBFCs in the middle layer (NBFC-ML) cannot charge pre-payment fees on floating rate business loans up to ₹50 lakh.
This applies regardless of whether the loan has co-obligants, closing a gap that earlier allowed charges to be imposed in such cases.
The Reserve Bank of India (pre-payment charges on loans) Directions, 2025 aim to bring consistency across lenders, ending the wide variations seen in loan contracts. Borrowers often faced different rules depending on the lender, even for similar loan products.
By setting uniform standards, the RBI is attempting to reduce disputes and improve trust between borrowers and lenders.
Another key change is around disclosure. All terms related to pre-payment charges must now be clearly mentioned upfront in the sanction letter, loan agreement and, where applicable, the key facts statement (KFS).
Charges not disclosed at the start cannot be introduced later. The RBI has also barred lenders from levying retrospective fees or reviving charges that were earlier waived at the time of pre-payment.
Borrowers using cash credit or overdraft facilities also get relief. If they choose not to renew such facilities and inform the lender in advance, no pre-payment charges can be imposed.
This is expected to give businesses greater flexibility while managing short-term funding needs.
For loans that switch between fixed and floating rates, the RBI has clarified that applicability will depend on the interest rate structure at the time of pre-payment. If the loan is on a floating rate when the borrower opts to repay early, the new directions will apply.