Definition
Prepayment & Foreclosure
Prepayment is paying part of a loan ahead of schedule, and foreclosure is repaying it fully before the tenure ends; both reduce interest, subject to any applicable charges.
Prepayment means paying extra toward a loan's principal beyond the EMI, which lowers the outstanding balance and total interest. Foreclosure is closing the loan entirely before maturity. Both can save significant interest, especially early in the tenure.
For floating-rate loans to individuals, RBI generally bars prepayment/foreclosure penalties, while fixed-rate and certain business loans may carry charges. Always check the loan terms for any fees.
Using surplus funds to prepay high-interest loans can be a strong financial move, though borrowers should weigh it against liquidity needs, tax benefits (e.g., on home-loan interest) and alternative investment returns.
Related terms
- EMI ConversionEMI conversion lets a credit-card purchase or loan amount be repaid in fixed monthly instalments over a chosen tenure, usually with interest or a processing fee.
- APRThe Annual Percentage Rate expresses the total yearly cost of a loan — interest plus mandatory fees — as a single percentage, enabling apples-to-apples comparison of credit offers.
- Floating vs Fixed Rate LoanA fixed-rate loan keeps the interest rate constant for the tenure or a period, while a floating-rate loan moves with a benchmark, changing EMIs or tenure as rates shift.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.