Applying for a loan? Penalty clauses you must know
What's the story
Loan agreements are a common financial tool in India, but they often come with penalty clauses that borrowers may not fully understand. These clauses can have significant implications if a borrower defaults or delays payment. Knowing these penalties is crucial for anyone considering taking out a loan. This article delves into five common penalty clauses in Indian loan agreements, helping borrowers make informed decisions and avoid unexpected financial burdens.
#1
Prepayment penalties explained
Prepayment penalties are charges levied when a borrower pays off their loan early, either partially or in full. These penalties are usually included to compensate lenders for the interest they lose out on when a loan is paid off before its scheduled term. In India, prepayment penalties can range from one to three percent of the outstanding principal amount, depending on the lender and type of loan.
#2
Late payment charges
Late payment charges are penalties for missing or delaying scheduled loan repayments. Most Indian lenders impose late fees as a percentage of the overdue amount or as a fixed sum per missed installment. The charges can vary widely but typically range from 1% to 5% of the overdue amount per month. Consistent delays may also affect your credit score.
#3
Bounce charges on EMI payments
Bounce charges apply when an equated monthly installment (EMI) fails due to insufficient funds in the borrower's account. This penalty is levied by banks or financial institutions for processing failed transactions. In India, bounce charges can range from ₹200 to ₹1,500 per failed transaction, depending on the bank's policy and the loan agreement's terms.
#4
Charges for document verification delays
Some lenders impose penalties if there are delays in providing required documents during the verification process after applying for a loan. These charges are usually applicable when borrowers take longer than agreed upon in submitting necessary paperwork like income proof or identity verification documents. They may incur additional costs between ₹500 and ₹2,000, depending on how long it takes to complete this process.
#5
Early closure fees on personal loans
Early closure fees are charged when personal loans are paid off before the agreed-upon tenure ends without any prior notice given beforehand, as per the terms outlined within the contract itself. These fees are usually applicable only if the borrower opts to close the account early, and they can vary from lender to lender, typically falling between 1% and 2% of the outstanding balance at the time of closure.