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If you have availed a business loan at any point, you will be familiar with the concept for foreclosure charges on business loans. As a borrower, it’s understandable if you would want to be debt free and pay off your loan. But when you do so, the banks lose on interest rates. And hence, the need for business loan foreclosure charges.
In this article, we will understand the meaning of foreclosure charges, why it makes sense (or not) to close your loan before the end of the tenure, and what are the foreclosure charges on business loans by leading banks and NBFCs in India.
What are foreclosure charges?
Let’s begin by understanding the meaning of foreclosure charges. A foreclosure charge is a penalty that lenders charge when you close a business loan (or any other) before its entire tenure. In many cases, banks have a minimum lock-in period, that is, the minimum tenure you will have to repay your EMIs before you can opt for loan foreclosure.
Business loan foreclosure
When you borrow a business loan, you have to repay the loan via EMIs. The EMI consists of a part of the principal amount and the interest charged by the lender. Now, in time you may be able to gather funds (e.g., through higher business profits etc.) and want to repay the balance loan in one go. This is a loan foreclosure – that is, you pay the remaining amount to close the loan in one go.
In most cases, lenders allow you to foreclose loans at a small charge or penalty. If you are confident of incoming funds in time, you can even pre-set your loan foreclosure timeline and avail the business loan based on that. In this way, you can repay the loan and close it as planned.
Business loan foreclosure charges: All banks and NBFCs
In the next section, we look at the foreclosure charges on business loans by different banks. Borrowers are strongly recommended to visit the nearest bank branch or online to check and confirm details of their loans.
HDFC business loan foreclosure charges
Before you head for a HDFC Bank business loan, let’s take a look at its foreclosure charges:
HDFC business loan foreclosure charges
|Interest rates||10% – 22% p.a.|
|Premature closure charges (full payment)||Applicable on outstanding principal after the cooling period
· 4% of outstanding principal for up to 24 EMI repayment
· 3% of outstanding principal for 24 to 36 EMI repayment
· 2% of outstanding principal for post 36 EMI repayment
|Premature closure charges (for part payment)||Partial premature payment is allowed up to 25% of the outstanding principal, once in the FY and twice during the entire loan tenure
· Allowed after payment of first EMI
· 4% of part repayment from post 01 to 24 EMI repayment
· 3% of part repayment from post 24 to 36 EMI repayment
· 2% of part repayment post 36 EMI repayment
Axis bank business loan foreclosure charges
Axis Bank also offers a range of business loans and professional loans for doctors and others. Here’s a quick look at the foreclosure charges levied by the bank on their business loans.
Axis bank business loan foreclosure charges – Small Business Banking
|Types||Secured term loans & Unsecured business loan|
2% of principal outstanding
· Up to 24 mths – 4% of principal outstanding at the time of prepayment + GST
· 25 – 36 mths – 3% of principal outstanding at the time of prepayment + GST
· 36+ mths – 2% of principal outstanding at the time of prepayment + GST
|Part pre-payment charges||Secured:
1% of pre-paid amount
2% charge + GST on amount prepaid
ICICI bank business loan foreclosure charges
Let us also look at the charges ICICI Bank levies on business loan foreclosure. The bank offers several types of business loans, including collateral free loans, GST business loans, term loans, working capital finance etc. The rate of interest, tenure, and loan amount varies.
ICICI bank business loan foreclosure charges
|Foreclosure charges||· Charges as per the terms and conditions mentioned in the loan sanction letter
· NIL foreclosure charges for micro and small enterprises (MSEs)
SBI Bank foreclosure charges
The lending facilities for SBI bank involves a wide range of loans for businesses. While the Simplified Small Business Loan is the most sought after for business loans up to ₹25 lakhs, there are other loans categories that the lender extends to small businesses.
(general – Not specific to business loans)
|· No penal interest for loans up to ₹25,000
· 2% p.a. if the irregularity exceeds the EMI
· 3% + GST foreclosure charges for Auto Loans – applicable if closed within 2 years from disbursement of loan
Kotak Mahindra Bank foreclosure charges
Kotak Bank offers business loans up to ₹1 crore for small, medium and large businesses. These are collateral-free business loans, meaning that as a borrower you do not have to pledge any asset as security for the loan.
Foreclosure charges on business loan in Kotak Mahindra Bank
|Foreclosure charges/ Prepayment charges
|· Up to 4% + taxes of foreclosure/closure charges of the outstanding
· Micro and small enterprises exempted from paying closure charges if paid through own funds (proof required)
Bajaj Finserv business loan foreclosure charges
Bajaj Finserv is a popular NBFC that offers business loans to businesses. It currently offers business loans in three categories – Term loan, Flexi Term loan, Flexi Hybrid loan. Loan amount extends up to ₹50 lakhs with interest rates ranging between 9.75% to 25% p.a.
|· Term Loan – Up to 4.72% on the outstanding amount as on the date of full prepayment
· Flexi Term Loan – Up to 4.72% of the total withdrawable amount as per the repayment schedule as on the date of full prepayment
· Flexi Hybrid Term Loan – Up to 4.72% of the total withdrawable amount as per the repayment schedule as on the date of full prepayment
|· Up to 4.72% of the principal prepaid on the date of such part prepayment
· N.A. for flexi term loan and hybrid flexi loan
In brief, when you borrow loans from a lender and instead of repaying EMIs you prefer to pay a lumpsum and close your loan before its due tenure, the banks will levy a foreclosure charge.
There are some RBI guidelines on foreclosure charges for MSMEs, that as a business owner you should be familiar with before borrowing.
At Tata nexarc, we understand how important it is for you to get a business loan on time and having clarity on your loan charges and fees. Contact now for Business Loans through Tata nexarc to get loans up to ₹50 lakhs. Minimum documentation, quick disbursal, low interest rates. You can even check your CIBIL score and calculate loan EMI easily.
How to calculate foreclosure charges?
In this section, we will take a look at how to calculate unsecured business loan foreclosure charges . This amount can range between 2% – 7% based on the lender. (Note – this is also applicable to business loans with collateral).
As you can see, different lenders have different repayment charges. The charges are calculated based on the remaining loan amount. As can be understood, charges on full payment are more than partial payment.
If you have borrowed an unsecured business loan for 3 years of ₹20 lakhs at 18% p.a. your EMI per month would be ₹72,304. This Emi constitutes part principal and part interest. As you keep paying your EMIs, the interest reduces, and the majority is taken up by the principal.
So, if you are closing your loan after 2 years (i.e., you have 12 EMIs remaining), the lender will calculate the principal amount from the outstanding and the foreclosure charges will be levied on it. If you repay with only 6 EMIs pending, the foreclosure amount will be lesser, while if you repay with 18 EMIs due, the foreclosure sum will be higher.
Some of the variable taken into account when calculating foreclosure are:
- Principal amount
- Loan tenure
- Interest rate
- Foreclosure charges in percentage (%)
- Foreclosure duration
Why close your loans before time?
A legit question at this point is, how does it benefit a business if they close their loans before time. After all, there are penalties and foreclosure charges levied. Also, there are tax benefits of a business loan. So, when you close a loan, you can’s avail it any more. Moreover, the lumpsum that you need to pay off the loan, can be invested elsewhere. So, why?
Here are some of the benefits of foreclosing your business loan:
- Be free of paying EMIs every month and avoid the consequences of not paying EMI
- Be debt free when you have the funds
In the end, evaluate your options, understand the perks and flip side of closing a loan and act accordingly.
This article is for information only. All readers are advised to check with the bank/NBFC on the latest details before availing a loan.