RBI Bans Pre-Payment Charges On Personal Loans From 2026; Details Inside
The Reserve Bank of India (RBI) has issued new directions prohibiting banks and financial institutions from levying pre-payment penalties on floating rate loans availed by individuals for non-business purposes in an effort to enhance borrower rights and ensure uniform lending practices.
The decision, announced on Wednesday, comes as a significant relief to individual borrowers who often face hurdles when attempting to repay their loans early or shift to lenders offering better terms. The RBI noted that some institutions had been using restrictive contractual clauses to limit customer flexibility and deter them from refinancing with more competitive lenders.
According to the RBI’s directive, “no pre-payment charges shall be levied on floating rate loans sanctioned to individual borrowers, for purposes other than business,” regardless of whether the repayment is made fully or partially, or from borrowed or own funds. The guideline also states that the benefit will apply irrespective of the presence of co-borrowers.
Effective Date And Scope
The new regulation, set to take effect from January 1, 2026, will be applicable to commercial banks (excluding payment banks), cooperative banks, NBFCs, and All India Financial Institutions. It also covers dual or hybrid rate loans—where part of the loan is on a fixed rate—if the floating rate is in effect at the time of repayment.
The RBI emphasized that there would be no lock-in period for availing this benefit, and added that if lenders still choose to impose pre-payment charges on other types of loans, these fees must be transparently disclosed in the loan sanction letter, agreement, and Key Facts Statement (KFS), where applicable. No retrospective or hidden charges will be permitted.
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Legal Backing and Simplification
The central bank stated: “In exercise of the powers conferred by Sections 21, 35A and 56 of the Banking Regulation Act, 1949, Sections 45JA, 45L and 45M of the Reserve Bank of India Act, 1934 and Section 30A of the National Housing Bank Act, 1987, hereby issues the Directions.”
Moreover, if the pre-payment is initiated by the lender, no charges can be levied in such cases either.
This move is part of the RBI’s efforts to bring clarity and uniformity in lending rules and address grievances stemming from inconsistent pre-payment policies. The latest directions supersede earlier circulars on the subject, consolidating them into a single, comprehensive regulatory framework.
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