Quick answer: A business loan costs more than its interest rate. The total usually includes a processing fee, GST on fees, valuation and legal charges on secured loans, penal charges for late payment and, in some cases, a charge for closing the loan early. Since 1 January 2026, an RBI rule stops specified lenders from charging prepayment penalties on floating-rate business loans to individuals and micro and small enterprises (MSEs). But it covers only loans sanctioned or renewed on or after that date, and only certain lenders, loan sizes and rate types. Before you sign, ask for the Key Facts Statement (KFS), compare the APR, and get the prepayment terms in writing.
Last checked against RBI sources on 22 October 2026. Rules and lender policies change, so confirm with your lender before acting. This is general information, not financial or legal advice.
What does a business loan really cost?
Two offers with the same interest rate can cost very different amounts. The extra cost usually sits in these items:
Charge | What it is | What to check |
|---|---|---|
Interest | Cost on the outstanding principal | Fixed, floating or a mix, and how the rate resets |
Processing fee | One-time fee for appraisal and sanction | The percentage, whether GST is extra, and whether any part is refundable |
GST on fees | Tax on the lender's fees | The amount shown in the sanction letter or KFS |
Valuation, legal and title charges | Common on property-backed loans | Who appoints the valuer and lawyer, and who pays |
Stamp duty and statutory charges | Set by state law | The amount for your state |
Insurance | Cover linked to the loan or the security | Whether it is required or optional, and who the insurer is |
Penal charges | For late payment or breach of terms | How they are calculated |
Prepayment or foreclosure charge | For part or full early repayment | Whether it applies to your loan (see below) |
Not every lender charges every item. The point is to ask for the complete schedule of charges, not just the rate. If your loan is secured, our guide to loan against property vs business loan explains how security changes cost and risk. Insurance around loans is a separate topic, covered in what banks can demand and what is optional.
Why the KFS and APR matter more than the headline rate
The RBI's Key Facts Statement (KFS) framework applies to retail and MSME term loans sanctioned on or after 1 October 2024. The KFS is a standard-format summary of the loan's key terms, written in simple language and explained to you before you commit.
Four features help you directly:
APR (Annual Percentage Rate) is the annual cost of credit. It includes the interest rate and the other charges the lender levies, and the KFS carries an APR computation sheet and a repayment schedule.
Third-party charges the lender collects, such as insurance and legal charges, are part of the APR and are disclosed separately.
Validity: the KFS carries a proposal number and stays valid for at least three working days for loans of seven days or more. Use that window to compare offers instead of deciding the same day.
No surprise fees: a fee not mentioned in the KFS cannot be charged during the loan without your explicit consent.
Here is a simplified, hypothetical comparison for a ₹25 lakh, 36-month term loan:
Offer A | Offer B | |
|---|---|---|
Interest rate (reducing balance) | 13.00% | 13.75% |
Processing fee | 2% (₹50,000) | 0.5% (₹12,500) |
Approximate EMI | ₹84,235 | ₹85,141 |
Total interest over 36 months | ₹5,32,456 | ₹5,65,070 |
Interest + processing fee | ₹5,82,456 | ₹5,77,570 |
Offer B has the higher rate but costs less overall in this example. The illustration ignores GST, timing and other charges, so your KFS's APR sheet is the real comparison. For the digital-lending side of KFS and APR, see our guide to RBI digital lending rules. Cash credit and overdraft limits are not term loans, so ask for the written schedule of charges in the sanction letter.
Can a lender charge you for prepaying or foreclosing a business loan?
Sometimes. Prepayment means paying part of the loan early. Foreclosure means closing the whole loan early. RBI's Pre-payment Charges on Loans Directions, 2025 (issued 2 July 2025) apply to loans and advances sanctioned or renewed on or after 1 January 2026. For floating-rate loans taken for business purposes by individuals and MSEs, the rule works like this:
Lender type | Prepayment charge on floating-rate business loans to individuals and MSEs |
|---|---|
Commercial banks (excluding small finance banks, regional rural banks and local area banks), Tier 4 urban co-operative banks, upper-layer NBFCs, All India Financial Institutions | Not allowed |
Small finance banks, regional rural banks, Tier 3 urban co-operative banks, State and Central co-operative banks, middle-layer NBFCs | Not allowed on loans up to ₹50 lakh sanctioned amount or limit |
Cases outside the above | As per the lender's approved policy, and it must be disclosed |
Other points from the Directions:
The rule applies whatever the source of funds for prepayment, and there can be no minimum lock-in period.
For loans with both fixed and floating periods, what counts is whether the loan is on a floating rate at the time you prepay.
No charge can be levied where the lender initiates the prepayment.
Whether a prepayment charge applies must be stated in the sanction letter and loan agreement, and in the KFS where one is required. A charge not disclosed this way cannot be levied.
A lender cannot charge, at the time of prepayment, fees it had earlier waived.
Where charges are allowed on a term loan, they must be based on the amount being prepaid. For cash credit or overdraft, a charge on closure before the due date cannot exceed the sanctioned limit. No charge applies if you give the notice your agreement requires and the facility closes on the due date.
Who is an MSE? From 1 April 2025, a micro enterprise has investment up to ₹2.5 crore and turnover up to ₹10 crore. A small enterprise has investment up to ₹25 crore and turnover up to ₹100 crore. Both limits must be met. Your Udyam registration shows your classification.
A hypothetical example: A small enterprise takes a ₹40 lakh floating-rate term loan from a commercial bank in March 2026 and closes it early with ₹30 lakh outstanding. Under the Directions, the bank cannot levy a prepayment charge. Suppose the same borrower had a fixed-rate loan from a lender whose policy allows 4% on the amount prepaid. That policy would apply instead, and 4% of ₹30 lakh is ₹1.2 lakh. Rate type, lender category, loan size and sanction date decide which case you are in.
If the rule does not cover your loan
Common situations are a fixed-rate loan, a loan sanctioned before 1 January 2026 and not renewed, or a borrower or lender outside the categories above. Then:
Find the clause in your sanction letter or agreement. It must be stated.
Ask how the charge is calculated and on what amount.
Ask whether a part-prepayment is treated differently from full closure.
If the clause is vague, get written clarification before you sign.
A sanction-letter checklist
Is the rate fixed, floating or dual, and how does it reset?
What is the processing fee, is GST extra, and is any part refundable?
What is the APR in the KFS, and does the repayment schedule match your cash flow?
Does the prepayment clause say whether a charge applies, and how it is calculated?
Is insurance required or optional, who selects the insurer, and is the premium added to the loan?
What valuation, legal, title and stamp costs apply, and who pays?
What are the penal charges for late payment?
Are there charges for statements, closure letters or document release?
Are the loan purpose, security and any guarantees described the way you discussed them?
Where do you complain if something goes wrong? Note the grievance contact in your loan documents.
Mistakes to avoid
Comparing only the rate or EMI. A lower EMI can come from a longer tenure and more total interest.
Assuming a "zero foreclosure" claim applies to you. Check the rate type, lender category, loan size and sanction date.
Signing on the first day. The KFS validity window exists so you can compare.
Ignoring non-interest costs on secured loans. Valuation and legal costs add up.
Treating processing fees as fixed without asking. Ask what the lender's policy is.
Should you prepay or switch lenders?
Compare what you would save in interest with everything it costs to leave: any prepayment charge that applies, the new lender's processing fee, and legal and document costs if the loan is secured. If your need is working capital, the right product may matter more than the rate. See working capital loan vs cash credit vs overdraft and how banks calculate cash credit limits. Lenders also look at turnover, cash flow and banking behaviour, as explained in how banks calculate business loan eligibility.
Before you sign
If you have offers in hand and want to talk through the structure, tenure and charges before choosing, ExpressDhan's team can discuss your requirement. Eligibility, pricing and approval depend on the lender, your profile and verification, and no outcome is guaranteed. You can learn about our services or contact us, or call +91 76199 77199 (Mon–Sat, 9:00 AM–6:30 PM).