One should go through the terms and conditions mentioned in a loan agreement carefully. Most loan agreements give the lender the right to revise the interest rate in case of change in market conditions. In case of floating rate loans, the bank already has such a leverage by default to vary the interest rates. This increase can be done unilaterally, at the option of the bank. The trigger for such a move is any unforeseen change in the money market conditions or the market interest rates.
Prepayment penalty
Another significant clause pertains to repayment of the loan before the due date or foreclosure of the loan. Some banks incorporate a clause regarding this issue. The conditions may range from seeking prior permission of the bank, the lock-in period during which the loan cannot be repaid and charges payable on foreclosure etc. Some banks levy prepayment penalty in case the loan is repaid before the full term or a certain agreed minimum period. The logic given by the banks is that it disturbs their cash flows and income estimates.
The amount varies from 1-5 percent of the outstanding amount of loan. However, many banks waive off these charges. In case these charges are applicable, they should be payable on the balance amount outstanding and not on the total amount of loan sanctioned.
Switchover charge
Then there are clauses related to switchover charges. In case you decide to switch over from one bank to another because the other is offering you better terms, some banks charge a penalty. However, if the loan is repaid out of your own funds, these charges may not be payable. This is done to avoid predatory pricing by banks.
Penalty for delay
Then there can be clauses on the penal interest payable in case of default or delay in payment of an EMI or dishonour of a cheque. Some lenders contain a condition that a change in the job of the borrower needs to be informed.
Disbursement date
There is a clause regarding the timing of disbursement of the loan. Some agreements treat the date of the cheque as the date of disbursement. Others treat the date of payment advice as the date of disbursement. Some treat the date of actual transfer of funds as the date of disbursement. There is a difference in these dates and as such affects the interest element.
Some loan agreements provide that the disbursement will be deemed to have been made to the borrower on the date on which the cheque or payment advice has been sent, irrespective of the date on which the disbursement may have been received by the borrower. As such, the borrower becomes liable to pay interest for the period even before he has actually received the loan money.
Restriction
A few banks have clauses which restrict borrowers from leaving India on employment or business for a long term before repaying the loan.
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