05 March, 2025 | 11:00 IST
The Reserve Bank of India (RBI) has proposed a major relief for borrowers by scrapping foreclosure charges on floating-rate loans taken by individuals for non-business purposes. The central bank, in a draft circular, also said that individuals and micro and small enterprises (MSEs) with business loans up to ₹7.5 crore should be allowed to prepay or foreclose their loans without penalties. However, the Tier-I and Tier-II urban cooperative banks and base-layer NBFCs are exempt from this rule.
Lenders will have to follow a board-approved policy for foreclosure charges, ensuring that any fees levied are based on the outstanding loan amount in term loans or the sanctioned limit for overdrafts and cash credit. Banks must also allow borrowers to prepay loans without imposing a minimum lock-in period.
The RBI has invited feedback from stakeholders until March 21, before finalising the guidelines.
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Floating-rate loans have interest rates that change based on market conditions. Unlike fixed-rate loans, where the interest remains constant, floating rates fluctuate depending on external benchmarks like the RBI’s repo rate or market-determined rates such as the MCLR (Marginal Cost of Funds-Based Lending Rate).
Borrowers go for floating-rate loans when they expect interest rates to fall, potentially lowering their repayment burden.
They also carry the risk of rising interest costs when rates increase.
Pros of Floating Interest Rate
Cons of Floating Interest Rate
If you are looking for a personal loan at an affordable interest rate, Moneycontrol offers multiple loan offers in partnership with eight lenders. You can apply for loans up to Rs 50 lakhs with interest rates starting at as low as 10.5% per annum. The 100% paperless application process also ensures quick and seamless disbursement.
If RBI’s rule is implemented, banks and NBFCs could see a drop in their earnings, as they make a significant amount from foreclosure charges. For larger banks like HDFC Bank, ICICI Bank and Kotak Mahindra Bank, the effect is expected to be limited, as they already do not charge prepayment penalties on MSE loans.
With foreclosure charges removed, borrowers may be more inclined to refinance their loans with new lenders offering lower interest rates. This could intensify competition among lenders, pushing them to adjust processing fees or loan pricing strategies to compensate for potential revenue loss.
A fixed interest rate means your loan’s interest stays the same throughout the tenure. This keeps your EMI constant, making budgeting easy. It’s a good choice if you want stability and don’t want to worry about market changes.
Fixed rates are usually 1.5% to 2% higher than floating rates. Even if market rates drop, your EMI won’t change, so you might end up paying more.
A floating interest rate changes based on market conditions and RBI policy decisions. It is linked to benchmarks like the RBI’s repo rate or MCLR (Marginal Cost of Funds-Based Lending Rate).
If interest rates go down, your EMI reduces, helping you save money. But, when interest rates increase, your EMI goes up. The floating interest rates can change during the repayment tenure based on the lender’s decision, while the fixed interest rates remain unchanged for the entire tenure.
Floating rates are cheaper than fixed rates, but they come with the risk of fluctuating payments.
ALSO READ: Personal Loan: Easy tips to get a good personal loan interest rate
If you prefer predictable payments, a fixed rate is safer. If you are comfortable with some risk and expect rates to drop, a floating rate can save you money. Some banks also offer hybrid loans, which start with a fixed rate and later switch to floating.
For those looking for flexible and competitive loan options, Moneycontrol’s online lending platform provides access to personal loan offers of up to ₹50 lakhs from eight lenders. With interest rates starting at 10.5% per annum and a 100% digital application process, getting a loan is now faster and easier.
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