What is prepayment on a loan?
Paying off part of a loan early, without closing it.
Paying more than the instalment due, so the outstanding balance falls faster than the schedule intended. Distinct from foreclosure, which pays the whole balance and closes the account — the two are treated differently both in the schedule and in the rules about what may be charged for them.
How is prepayment calculated?
The extra amount reduces the principal, and the schedule is then rebuilt one of two ways: a shorter tenor with the instalment unchanged, or the same tenor with a smaller instalment. Shortening the tenor saves the borrower considerably more interest, and is the option they are least often offered.
Prepayment: a worked example
₹4,00,000 outstanding at 14% with eight years left. A ₹1,00,000 part payment applied to the tenor ends the loan roughly two years early; applied to the instalment it lowers the monthly payment by a few thousand rupees and saves a fraction as much interest. Same money, materially different outcome.
Why does prepayment matter?
For the borrower it is the cheapest interest they will ever save. For the lender it is a yield question and a conduct question at the same time — and increasingly the second one is decided outside the loan agreement.
What the regulations say about prepayment
Whether a charge may be levied turns on the rate type, the borrower's constitution and the purpose of the loan. The 2025 Directions have two limbs that must be read separately: one binds every lender, while the other names entity classes and omits the Base Layer.
What a lending system has to do about prepayment
The quote and the posting run the SAME eligibility test and the same charge calculation from one place, so a screen cannot quote nil and then charge. Where the charge is nil, the reason is stated rather than left blank — ₹0 with no explanation cannot be told apart from a mistake. The statutory bar is applied by the system, not left to whoever configured the scheme.
Related terms
- Foreclosure — Closing a loan by paying the whole outstanding early.
- EMI (equated monthly instalment) — A fixed monthly payment covering both interest and principal.
- KFS (Key Facts Statement) — A standard-format summary of what a loan actually costs.
- APR (annual percentage rate) — The all-in cost of a loan, expressed as a yearly rate.
From the people who wrote this
Run your lending on Lenviq
The section above describes what a lending system has to do about this term. Lenviq does it — on every account, computed at day-end, with the direction it comes from recorded against it.
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