Question: A person takes floating rate personal loan of Rs 6,00,000 for one year to meet the emergency expense. The bank Charges 11% annual interest and deducts processing fee of 1.5% of the loan amount along with a documentation charge of Rs 1,500 at disbursement. After 6 months, the borrower decides to close the loan early. Assume no foreclosure charges apply under RBI guidelines. The bank record shows that Rs 28,000 has been paid as interest so far and the outstanding principal is Rs 3,10,000. What is the total cost incurred by the borrower up to the time of foreclosure including interest and all applicable charges?
Answer: Processing Fee = 1.5% of Rs 6,00,000 = Rs 9,000
Documentation Charge = Rs 1,500
Total Upfront Charges = Rs 9,000 + Rs 1,500 = Rs 10,000
Next, add the interest already paid during the first 6 months.
Interest paid = Rs 28,000
As per RBI guidelines, no foreclosure charges are applicable on this floating rate personal loan.
Therefore, the closure penalty is Rs 0
Total cost incurred = Upfront Charges + Interest paid
= Rs 10,500 + Rs 28,000
= Rs 38,500
The outstanding principal of Rs 3,10,000 is not treated as cost because it is simply the repayment of the borrowed amount.
Final Answer = Rs 38,500.

Supporting evidence:
title: fidcindia.org.in/RBI-PRE-PAYMENT-CHARGES-02-07-25.pdf
quote: (i) For all loans granted for purposes other than business to individuals, with or without co-obligant(s), an RE shall not levy pre-payment charges;
context: Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025

2270 5670, 2260 5671, 5691 2270, 2260 5692
Department of Regulation, Central Office, 12th & 13th Floor, Central Office Building, Shaheed Bhagat Singh Marg, Mumbai
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4. These Directions shall apply to all commercial banks (excluding payments banks), cooperative banks, NBFCs and All India Financial Institutions.
5. An RE shall adhere to the following Directions regarding levy of pre-payment charges on all floating rate loans and advances:
(i) For all loans granted for purposes other than business to individuals, with or without co-obligant(s), an RE shall not levy pre-payment charges;
(ii) For all loans granted for business purpose to individuals and MSEs, with or without co-obligant(s):
- (a) A commercial bank (excluding Small Finance bank, Regional Rural bank and Local Area bank), a Tier 4 Primary (Urban) Co-operative bank, an NBFC-UL, and an All India Financial Institution shall not levy any pre-payment charges.
- (b) A Small Finance bank, a Regional Rural bank, a Tier 3 Primary (Urban) Cooperative bank, State Cooperative bank, Central Cooperative bank and an NBFCML shall not levy any pre-payment charges on loans with sanctioned amount/ limit up to ₹50 lakh.
(iii) The Directions at paragraphs 5(i) and 5(ii) above shall be applicable irrespective of the source of funds used for pre-payment of loans, either in part or in full, and without any minimum lock-in period.
(iv) Applicability of above Directions for dual/ special rate (combination of fixed and floating rate) loans will depend on whether the loan is on floating rate at the time of prepayment.

Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025

6. In cases other than those mentioned at paragraphs 5(i) and 5(ii) above, pre-payment charges, if any, shall be as per the approved policy of the RE. However, in case of term loans, pre-payment charges, if levied by the RE, shall be based on the amount being prepaid. In case of cash credit/ overdraft facilities, pre-payment charges on closure of the facility before the due date shall be levied on an amount not exceeding the sanctioned limit.
7. In case of cash credit/ overdraft facilities, no pre-payment charges shall be applicable if the borrower intimates the RE of his/ her/ its intention not to renew the facility before the period as stipulated in the loan agreement, provided that the facilit