Penalty Charges on Loans: What You Should Know

Penalty charges, also called penal charges, are additional amounts a lender may charge when a borrower does not meet the agreed terms of a loan, such as missing an EMI payment or delaying repayment beyond the due date. These charges are separate from the regular interest rate on the loan and are meant to encourage timely repayment rather than generate extra income for the lender. As per RBI rules effective from 1 April 2024, lenders must levy these as a fixed penal charge, not as penal interest added to the principal. The exact amount and conditions are mentioned in your loan agreement and Key Fact Statement (KFS).

Why do NBFCs and banks levy penalty charges

Lenders, including NBFCs and banks, add penalty charges to loan accounts for a few practical reasons:

• To encourage borrowers to make repayments on time and maintain credit discipline.
• To cover the administrative cost of following up on a missed or delayed payment.
• To offset the short term impact when expected funds are not received on schedule.
• To ensure fairness among borrowers, since timely repayers should not bear the cost of delays caused by others.

Under RBI guidelines, penalty charges are not meant to be a source of revenue for the lender. The charges must be reasonable and proportionate to the actual default, and lenders cannot use them to earn additional profit. This is different from how charges sometimes worked before April 2024, when penal interest could be added to the outstanding loan amount and compounded further.

RBI guidelines on penalty charges you should know

The Reserve Bank of India (RBI) issued updated guidelines on penal charges through its circular dated 18 August 2023, effective from 1 April 2024. Some of the key rules include:

These guidelines apply to all regulated entities, including NBFCs like Bajaj Finance, and are designed to bring more transparency and fairness to how penalty charges are levied.

Penalty charges are added to your outstanding dues and need to be cleared along with your regular EMI, but they do not usually appear as a separate line item on your credit report. However, the underlying reason for the penalty, such as a missed or delayed EMI, is reported to credit bureaus and can lower your credit score. Repeated delays may also affect your credit history and reduce your eligibility for future loans. Since penal charges are not compounded, they will not keep growing on their own, but the missed payment itself remains the bigger concern for your credit profile. Clearing all dues on time, including any penalty charges, helps you maintain a healthy repayment record.

Simple ways to avoid penalty charges

A few simple habits can help you avoid penalty charges altogether:

• Set up a NACH (National Automated Clearing House) mandate so your EMI is deducted automatically on the due date.
• Keep sufficient balance in your linked bank account a day or two before the EMI date.
• Mark your EMI due date on a calendar or set a reminder.
• Reach out to your lender in advance if you expect a genuine difficulty in paying on time.
• Review your loan agreement and KFS to understand the exact penalty terms applicable to your loan.

Raising a service request or grievance

For any concerns related to your loan account, use Bajaj Finserv's official service channels:

1. Log in to the Bajaj Finserv Service Portal
2. Go to Help & Support → Raise a Request
3. Submit your concern with your loan account details
4. Track resolution within 5–7 business days

For unresolved matters, escalate to the Nodal Officer or the RBI Banking Ombudsman via the Grievance Redressal page.

Know more: Grievance Redressal | How to Complain

Missing an EMI has consequences beyond that month's bill. It can affect your credit report, your standing as a borrower, and your eligibility for loans in future. Paying on time is always the better choice, and the Service Portal makes it easy to keep track of your dues each month.