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Financial institutions keep the economy running smoothly. From offering loans<\/a> and credit to helping individuals and businesses manage their finances, they are at the heart of everyday financial transactions. However, providing finances also means that these institutions are putting themselves at the risk of losing money due to defaults and late repayments. So, to protect themselves, they have various mechanisms in place.<\/p>\n\n\n\n One such mechanism is penal charges, a concept that often arises in the context of loans, mortgages, and credit facilities. In this article, we\u2019ll take a closer look at penal charges meaning, why they are used, and how they affect both lenders and borrowers.<\/p>\n\n\n\n Penal charges, meaning an additional fee charged on loan or credit card<\/a> payments by financial institutions to borrowers who fail to make payments in accordance with the agreed-upon terms. The fee is attracted in case of delays in installments or EMIs<\/a>, and serves as a deterrent to late payments, non-payment, or other forms of default that might occur during the life of the loan agreement. The main purpose of this fee is to promote accountability and punctuality among borrowers and safeguard financial institutions against loan fraud.<\/p>\n\n\n\n The financial institute can charge a penalty either on the entire outstanding amount<\/a> or as a percentage of the missed loan installment.<\/p>\n\n\n\n In case the interest is levied on the outstanding amount, the applicable penal rate is identified as per the loan agreement<\/a>, and added to the existing interest rate to levy a new and higher rate on the outstanding loan.<\/p>\n\n\n\n For example, if the loan is borrowed at 12% p.a, and a penalty rate of 3 is attracted due to delayed payment, the new interest rate will be 15% p.a for the remaining amount.<\/p>\n\n\n\n In case the penalty is charged as a percentage of the missed installment, the penal rate is multiplied by the EMI amount to calculate the new amount due. For example, if you have a loan with an EMI of Rs. 50,000, which is delayed, at a late payment rate of 24% p.a., the penalty will be Rs. 1,000.<\/p>\n\n\n\n The GST Authority has imposed a GST of 18% on such payments. Once the penal charges amount is calculated as per the overdue amount and duration, GST would be applicable. So, in the example above, the total penalty will be Rs. 1,180 after including the 18% tax.<\/p>\n\n\n\n In many cases, if the borrower displays punctuality in payment of subsequent installments, the hiked interest rate can be reduced or withdrawn for the outstanding amount at the discretion of the financial institution. However, it is recommended that these circumstances be discussed at length and clarified before acceptance of the loan.<\/p>\n\n\n\n While these charges and interests serve to safeguard financial institutions, there are regulations in place to ensure that they are used fairly and transparently.<\/p>\n\n\n\n The RBI states that in case of default in payment<\/a>, only penal charges may be applied, and they shall be reasonable and levied by the lenders only on the amount under default in a non-discriminatory manner as per their Board-approved policy. Further, it must be ensured that there is no capitalization of the penal charges, meaning no further interest is computed on such charges. This policy prevents the accumulation of excessive charges that could push borrowers into deeper financial distress.<\/p>\n\n\n\n Financial institutions levy penalties primarily on delayed or non-payment of loan installments, but the borrower can also attract the following fees:<\/p>\n\n\n\n It is crucial that the borrower discusses all the above penalties and the circumstances for their application with the lending institution before entering into a legal loan agreement.<\/p>\n\n\n\n The common scenarios in which you need to pay the penal charges in loan accounts include:<\/p>\n\n\n\n The best practices to avoid penal charges on your loan include:<\/p>\n\n\n\n A robust risk mitigation framework helps financial institutions maintain a stable revenue stream, in turn offering stability and protection to their customers who trust them with their wealth. Therefore, it is important to choose a financial institution that prioritizes transparency and trust in its dealings.<\/p>\n\n\n\n At Tata Capital, we have a team of financial experts ready to guide you through the loan application process and ensure that you are aware of your options before you make your decision. Our personal loan<\/a> is offered with an easy online approval system to streamline your application.<\/p>\n\n\n\n Learn more about our low personal loan interest rates<\/a> and flexible repayment options by visiting the Tata Capital<\/a> website or downloading the app.<\/p>\n\n\n\n <\/p>\n","protected":false},"excerpt":{"rendered":" Financial institutions keep the economy running smoothly. From offering loans and credit to helping individuals and businesses manage their finances, they are at the heart of everyday financial transactions. However, providing finances also means that these institutions are putting themselves at the risk of losing money due to defaults and late repayments. So, to protect […]<\/p>\n","protected":false},"author":1,"featured_media":47927,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[74],"tags":[],"yoast_head":"\nWhat are penal charges?<\/strong><\/h2>\n\n\n\n
Penal charges calculation: How the penal interest rate & penal fee are applied<\/strong><\/h2>\n\n\n\n
Can the penal charges rate be withdrawn?<\/strong><\/h2>\n\n\n\n
How does the law protect the borrowers?<\/strong><\/h2>\n\n\n\n
Types of penal charges: Bounce charge, penal fee, overlimit, prepayment penalty<\/strong><\/h2>\n\n\n\n
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Penal charges in banking: Common scenarios when you pay a penalty fee<\/strong><\/h2>\n\n\n\n
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How to avoid penal charges in loan EMIs: Best practices in India<\/strong><\/h2>\n\n\n\n
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Conclusion<\/strong><\/h2>\n\n\n\n