Penal Interest

What does it mean?

In case a borrower does not pay instalments as per the loan contract, the lender will levy penal interest. Penal interest rates are generally pre-decided and charged as per the terms of the loan agreement.

Penal interest can be charged in two ways – by increasing the interest rate for the outstanding loan amount or by levying a penalty as a percentage of the missed EMI amount. This depends on your lender. As of now, GST is also applicable on penal interest, further increasing your costs. So, ensure you have a repayment plan in place before you borrow. 

Be aware that the RBI is currently reviewing penal interest and penal charges of lenders in India. It is looking to reduce any misuse and boost transparency and consistency. Check back here to see the latest guidelines once they are finalised. 

Points to remember: 

• You can negotiate with your lender to remove the penal interest or reduce it.
• If you make regular payments for over six months, you can request that your interest be reset to the pre-penalty rate.

FAQs on Penal Interest

What is penal interest?

Penal interest is the charge applied in case of non-payment of the EMI by the due date. It is usually levied on the outstanding EMI amount. 

What is a penal interest rate?

The penal interest rate is the rate at which the financial institution will charge the penalty in case of delay in repayment. The rate is not fixed and depends on the financial institution’s policy.

How to calculate penal interest?

To calculate penal interest, you will first have to figure out whether the lender will levy it on the entire loan amount by increasing your effective interest or only on the delayed EMI amount. If it is the former, you can add the penal rate to your actual rate and your next EMI amount will change. For example, if your current rate is 12%, and the penalty rate is 3, your interest rate will increase to 15%.

If it is the latter, consider the penal rate mentioned in your agreement with the lender. Generally, it is expressed per annum, but it applies on the monthly instalment or the EMI for the number of days by which the payment is delayed. If your lender applies penal interest of 24% p.a., then the daily rate becomes 0.0657% (i.e., 24/365).

How to calculate penal interest on a loan?

The calculation of penal interest depends on your EMI amount and the rate levied by the lender. For example, say the penal interest rate is 24% p.a. and your transaction amount is ₹10,000. Suppose you delay the payment by 31 days, the applicable rate would be 0.0657% (24/365). With this value, your penal interest would amount ₹203.67 (0.0657% of ₹10,000 multiplied by 31).

What is the penal interest calculation formula?

The formula for penal interest is:

Penal interest = daily penal interest x number of days of delay

Here, daily penal interest = outstanding amount x (penal interest rate/365) % 

For example, say there is a delay of 20 days, the outstanding amount is 12,000 and the rate is 24%. So, daily penal interest = 7.89 {[12,000 x (24/365)]/100}. 

With this, penal interest = 157.8 (7.89 x 20)

How to use a penal interest calculator?

To use the calculator, you will need the amount due, penal interest rate, due date, and the date on which you paid the delayed amount. You can enter these details in the calculator and check the results. Remember, the actual figure levied by your lender may vary due to a difference in calculation. You can contact your lender to know more.