What is Penal Charges? How is it Calculated?

Financial institutions provide loans to individuals and businesses with the expectation of timely repayment. However, when borrowers fail to meet repayment deadlines, lenders impose Penal charges against delays or defaults.

Understanding the meaning of Penal Charges and its implications is crucial for borrowers, as it helps them manage their loans effectively and avoid unnecessary financial penalties.

What Is Penal Charges?

Penal charges is an extra amount imposed by lenders when a borrower fails to make loan payments or Equated Monthly Instalments (EMIs) on time. It serves as a deterrent against delays and compensates lenders for the increased risk and administrative costs associated with late payments.

For instance, if a borrower has an outstanding EMI of INR 50,000 and misses the due date, penalty interest on late payments will be applied to the overdue amount, increasing the total repayment obligation.

How Is Penal Charges Calculated?

The calculation of Penal charges can vary based on lender policies. It is typically charged either on the outstanding loan amount or as a percentage of the missed EMI. Additionally, a Goods and Services Tax (GST) of 18% is applicable on Penal charges, further increasing the total payable amount.

Can the Penal Charges Rate Be Withdrawn?

Yes, some financial institutions may waive or reduce penal charges if the borrower demonstrates a consistent repayment record in the future. However, this is entirely at the lender’s discretion and should be clarified before signing the loan agreement.

How Does the Law Protect Borrowers?

The Reserve Bank of India (RBI) has regulations in place to ensure fairness in the imposition of penal charges, including:

• Penal charges must be reasonable and levied only on the amount under default in a non-discriminatory manner as per the lenders’ Board approved policy.
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These rules prevent excessive charges and protect borrowers from financial distress due to accumulating penalties.

What Are Some Other Types of Penal Charges?

Apart from penal charges, financial institutions may impose additional charges under specific conditions:

• Cheque/ECS/NACH Dishonour Charges: A fee imposed when a loan repayment fails due to insufficient funds or other reasons.
• Loan Cancellation Charges: A fee charged when a borrower cancels the loan before the first EMI is debited, typically covering administrative and processing costs incurred by the lender.
• Prepayment Charges: A fee applied when a borrower repays the loan before the tenure ends.

Understanding these charges before signing a loan agreement enables borrowers to make informed financial decisions and avoid unexpected penalties.

When Is Penal Charges Charged?

Borrowers may be subject to Penal charges in the following situations:

• When scheduled loan payments are not made on time.
• When EMIs remain unpaid for a prolonged period, leading to a potential default.
• Failure to meet contractual obligations, such as not submitting required documentation or violating agreed-upon terms.

Each lender has specific policies regarding penal charges, so borrowers should carefully review the loan agreement before committing.

Difference Between Penal Charges and Late Payment Fee

Penal charges and late payment fees both apply when borrowers miss loan payments, but they work slightly differently. Penal charges is typically calculated as a percentage on the overdue amount and accrues until the payment is made. In contrast, a late payment fee is a fixed, one-time charge imposed for missing a due date. It is essential for borrowers to clarify with their lender how late payment charges will be applied to avoid unexpected costs.

How to Avoid Penal Charges?

To prevent penal charges, borrowers should:

• Make Timely Payments: Set reminders or enable auto-debit for EMIs to avoid missing due dates.
• Communicate with Lenders: Discuss with the lender to discuss alternative repayment plans, if required.
• Review Loan Agreements: Understand the lender’s penal charges policies before signing the loan agreement.
• Maintain Sufficient Balance: Ensure adequate funds are available in your account for EMI deductions to prevent payment failures.

Effective financial planning and proactive communication with the lender can help borrowers avoid penalties and ensure a smooth loan repayment experience.

Final Thoughts

Penal charges serves as a deterrent against delayed payments, encouraging responsible repayment behaviour. Understanding when penal charges is charged and how it is calculated helps borrowers manage their loans effectively and avoid unnecessary financial burdens.

At SMFG India Credit, we offer personal loans of up to INR 30 lakhs* at competitive interest rates, transparent processing, and no hidden fees. Apply online today or contact us for personalised guidance.