Penal Interest on Overdue Loans: How It's Calculated

Penal interest is a commonly used term for an additional amount associated with delayed loan repayment. However, under RBI guidelines, penalties for non-compliance with material terms and conditions of a loan agreement are treated as penal charges, rather than being added to the contracted interest rate as penal interest. Penal charges cannot be capitalised, meaning further interest cannot be calculated on the penal charge itself. When an EMI becomes overdue, the amount payable may include regular or overdue interest on the unpaid amount at the contracted rate, a separate penal charge for specified default or non-compliance, and other applicable charges, depending on the loan terms. RBI guidance also clarifies that interest on unpaid interest, including an unpaid EMI, may continue at the contracted rate until the default is remedied. This is different from charging penal interest. Understanding this distinction can help borrowers identify the components of overdue loan dues, review their loan agreement and take timely action to regularise repayment.

How is penal interest calculated on a loan?

No single universal penal interest formula exists because lenders may determine penal charges under their approved policies and loan-specific terms. If a loan agreement specifies a percentage-based penal charge calculated on the amount in default for the period of default, an illustrative calculation can be represented as:

Penal charge = Default amount × Applicable penal charge rate × Number of days in default ÷ 365

For example, if a lender's authorised terms specify a particular rate and calculation basis, the default amount and applicable period would be used according to those terms. This formula is illustrative only. It does not represent a standard Bajaj Finance rate or confirm that every loan uses a daily percentage calculation. A lender may instead specify a fixed charge or another permitted calculation method.

RBI requires penal charges to be reasonable, proportionate to the non-compliance and applied in a non-discriminatory manner within a particular loan or product category.

What is the difference between regular interest and penal charges?

Regular interest is the contracted cost of borrowing, while a penal charge is a separate charge that may apply when specified loan terms are not complied with.

The RBI framework states that penal charges should not be introduced as an additional component of the interest rate. It also prohibits capitalisation of penal charges, although normal interest compounding procedures on the loan account are not affected. This means borrowers should not simply add a penalty percentage to their contracted interest rate when estimating the total amount payable.

Clearing an overdue loan amount promptly can help prevent the delay from continuing and may limit the additional costs associated with overdue repayment. Review the total amount due and pay through authorised channels to keep your loan account up to date.

• Check your overdue amount: Review the outstanding EMI, applicable interest and charges to understand the total amount due.
• Make the payment promptly: Clear the overdue amount as soon as possible to prevent further delays.
• Use official payment channels: Make the repayment through authorised payment options to ensure the amount is credited to the correct loan account.
• Check your loan account: After making the payment, review the account to confirm that the overdue amount has been addressed.
• Raise a service request if needed: If you notice an incorrect charge or payment-related issue, use the available Bajaj Finance service channels to raise a request.
• Keep payment records: Save the transaction confirmation or payment receipt for your records.
• Avoid further missed EMIs: Keep sufficient funds available before the next due date and follow the repayment schedule to reduce the risk of additional overdue amounts.

Taking timely action after an EMI becomes overdue can help you manage the account responsibly and avoid the delay extending further. If you have a payment or account-related concern, check your loan details and use the appropriate Bajaj Finance service channel for help.

Steps to check and pay overdue loan dues through Bajaj Finance platforms

You can check your loan account and available repayment options through the Bajaj Finance App or My Account before making an overdue payment.

Steps through My Account or the Bajaj Finance App

1. Open the Bajaj Finance My Account portal or the Bajaj Finance App.
2. Sign in using your registered mobile number and verify your account with an OTP.
3. Navigate to Service and select your loan account under Your Relations.
4. Select Make loan payments or the available loan payment option.
5. Select Missed instalments/bounce charges, where this option is displayed for your loan account.
6. Review the amount displayed, including any applicable overdue dues or charges.
7. Complete the payment using the available payment method.
8. Download or save the payment receipt for your records.

The exact options displayed may depend on your loan account and the services available at the time. If you've already made a payment but the account still shows an overdue amount, check the payment reference before making another payment, and raise a service request if you need clarification.

What is the penal interest rate charged by Bajaj Finance?

The applicable penal charge for a Bajaj Finance loan depends on the loan product and the terms specified in the relevant loan agreement. Therefore, no single penal interest rate applies uniformly to every borrower or loan. Under RBI guidelines, penalties for non-compliance with material terms of a loan agreement are treated as penal charges, rather than an additional interest rate. These charges must not be added to the contracted rate of interest or capitalised, which means further interest cannot be calculated on the penal charge itself. Check the exact applicable charge in the loan agreement, sanction terms, or relevant schedule of charges. Borrowers with an overdue EMI should review the total amount payable and make the required payment promptly. Timely repayment can help prevent the overdue period from continuing and reduce the risk of additional costs under the applicable loan terms. If the amount shown appears unclear, borrowers can use the available Bajaj Finance service channels to seek clarification.