Investor query: Is foreclosing a high-cost Rs 8 lakh loan smarter than keeping a Rs 5 lakh fixed deposit?
A family’s financial misstep has sparked a pressing question: is it wiser to foreclose a high-interest Rs 8 lakh loan or continue paying EMIs while holding a Rs 5 lakh fixed deposit? With multiple charges inflating the real cost of the loan, the investor seeks clarity on the smartest route forward. Expert analysis now sheds light on which option truly minimises long-term financial loss.
- Nov 22, 2025,
- Updated Nov 22, 2025 7:13 PM IST
I recently discovered that my father took an Rs 8 lakh loan from Bajaj Finance at 18% interest, including Rs 20,000 for insurance and Rs 30,000 in processing fees — even though he only needed Rs 3 lakh. He kept the remaining Rs 5 lakh in a fixed deposit. I’m frustrated because I have emergency savings for situations like this, but he didn’t ask for help. Now, if I try to close the loan, there’s a Rs 50,000 prepayment penalty on top of other charges. I’m confused about what’s financially smarter — should I prepay despite the costs, or let the EMIs continue while managing the fixed deposit?
Inputs by Dev Patel, Quantitative Research Analyst at 1 Finance
This situation is a reminder of why open conversations about money are so valuable in families. If your father had known about your emergency savings, he might not have taken this loan in the first place. Going forward, making personal finance a regular topic of discussion can help ensure that family members know what resources are available when needs arise, so everyone can support each other in making the best financial decisions.
The decision to prepay the entire loan is financially smart. Here's why:
Assuming a 3-year loan tenure, you'll pay Rs 2.4 lakh in interest on the Rs 8 lakh principal, while the Rs 5 lakh fixed deposit will earn only Rs 1.1 lakh in interest (7%). This leaves a net cost of Rs 1.3 lakh. Additionally, FD interest is taxed at your father's income tax slab rate, further reducing returns. Even after factoring in the Rs 50,000 prepayment penalty, you still save Rs 80,000. If the loan tenure is longer than 3 years, your savings will be even greater.
Before prepaying, verify the exact prepayment/foreclosure penalty from the loan sanction letter. Bajaj Finance personal loans typically charge up to 4.72% (inclusive of all taxes).In your case, with a loan amount of Rs 8 lakh, the prepayment penalty should be Rs 37,760. The Rs 50,000 you mentioned works out to 6.25%, which seems high. The processing fee of Rs 30,000 is within the limit of 3.93% given by Bajaj Finance.
After foreclosing the loan, please collect the 'No Due Certificate' (NDC) from Bajaj Finance. This document formally confirms that all outstanding dues have been fully repaid. About the ₹20,000 insurance policy, this is a classic case of cross-selling. Lenders often bundle insurance products with loans to protect their interests, but if your father already has adequate term insurance coverage, this additional policy may be unnecessary. Have a qualified financial advisor review the policy terms to determine whether continuing it makes sense for your family's actual needs.
Before taking any sort of credit, it is important to consult a financial advisor to assess the need and the affordability. With the loan of Rs 8 lakh, almost Rs 1 lakh was the cost associated with it (processing fee, upfront insurance premium, and foreclosure charge). A qualified financial advisor will assess the lenders beyond the interest rate and help you make an informed decision, considering your finances holistically.
(Views expressed by the expert are his/her own. E-mail us your investment queries at askmoneytoday@intoday.com. We will get your queries answered by our panel of experts.)
I recently discovered that my father took an Rs 8 lakh loan from Bajaj Finance at 18% interest, including Rs 20,000 for insurance and Rs 30,000 in processing fees — even though he only needed Rs 3 lakh. He kept the remaining Rs 5 lakh in a fixed deposit. I’m frustrated because I have emergency savings for situations like this, but he didn’t ask for help. Now, if I try to close the loan, there’s a Rs 50,000 prepayment penalty on top of other charges. I’m confused about what’s financially smarter — should I prepay despite the costs, or let the EMIs continue while managing the fixed deposit?
Inputs by Dev Patel, Quantitative Research Analyst at 1 Finance
This situation is a reminder of why open conversations about money are so valuable in families. If your father had known about your emergency savings, he might not have taken this loan in the first place. Going forward, making personal finance a regular topic of discussion can help ensure that family members know what resources are available when needs arise, so everyone can support each other in making the best financial decisions.
The decision to prepay the entire loan is financially smart. Here's why:
Assuming a 3-year loan tenure, you'll pay Rs 2.4 lakh in interest on the Rs 8 lakh principal, while the Rs 5 lakh fixed deposit will earn only Rs 1.1 lakh in interest (7%). This leaves a net cost of Rs 1.3 lakh. Additionally, FD interest is taxed at your father's income tax slab rate, further reducing returns. Even after factoring in the Rs 50,000 prepayment penalty, you still save Rs 80,000. If the loan tenure is longer than 3 years, your savings will be even greater.
Before prepaying, verify the exact prepayment/foreclosure penalty from the loan sanction letter. Bajaj Finance personal loans typically charge up to 4.72% (inclusive of all taxes).In your case, with a loan amount of Rs 8 lakh, the prepayment penalty should be Rs 37,760. The Rs 50,000 you mentioned works out to 6.25%, which seems high. The processing fee of Rs 30,000 is within the limit of 3.93% given by Bajaj Finance.
After foreclosing the loan, please collect the 'No Due Certificate' (NDC) from Bajaj Finance. This document formally confirms that all outstanding dues have been fully repaid. About the ₹20,000 insurance policy, this is a classic case of cross-selling. Lenders often bundle insurance products with loans to protect their interests, but if your father already has adequate term insurance coverage, this additional policy may be unnecessary. Have a qualified financial advisor review the policy terms to determine whether continuing it makes sense for your family's actual needs.
Before taking any sort of credit, it is important to consult a financial advisor to assess the need and the affordability. With the loan of Rs 8 lakh, almost Rs 1 lakh was the cost associated with it (processing fee, upfront insurance premium, and foreclosure charge). A qualified financial advisor will assess the lenders beyond the interest rate and help you make an informed decision, considering your finances holistically.
(Views expressed by the expert are his/her own. E-mail us your investment queries at askmoneytoday@intoday.com. We will get your queries answered by our panel of experts.)