10 Clauses to Read Before Signing Any Loan Agreement

Most borrowers sign loan documents without reading them. Banks count on this. A standard loan agreement can run 30–80 pages and contains clauses that can significantly affect your cost and rights. Here are the 10 most important ones to check every time.

The 10 Clauses

1The Annualised Interest Rate (APR)
Confirm the exact annual percentage rate — not just the headline rate. Ensure it matches what was quoted in the sanction letter and what you calculated independently. From 2024, this must be in the Key Fact Statement.

2All Fees and Charges
Processing fees (typically 0.5–2% of loan amount), MOD charges, CERSAI fees, legal and technical charges, documentation charges — all must be listed. Ask for a complete fee schedule before signing, not after.

3Fixed vs Floating Rate Clause
If on a floating rate, confirm whether it is linked to repo rate (EBLR/RLLR) or MCLR. Verify the reset period — repo-linked rates must reset within 3 months. Understand who sets the "spread" and whether it can change.

4Prepayment and Foreclosure Terms
For floating-rate individual loans, no penalty is permitted (RBI circular). For fixed-rate loans, check the penalty percentage, the lock-in period (if any), and whether it applies to partial prepayments as well.

5EMI Bounce and Penalty Charges
Missing an EMI triggers a bounce charge (₹300–₹1,000), a penal interest charge (2–4% per annum on the overdue amount), and a negative credit bureau entry. Confirm the exact amounts and how long the penal interest accrues.

6Loan Recall Clause
Banks reserve the right to recall the entire loan if you default, breach any term, or in some cases if your credit profile "deteriorates." Understand under what specific conditions this can be triggered.

7Disbursement Schedule (for home loans)
For under-construction properties, disbursements are staged. Confirm the schedule, who triggers each stage, and whether you pay full EMI or pre-EMI (interest-only) until full disbursement. Pre-EMI periods are often not disclosed upfront.

8Insurance Linkage
Banks frequently bundle home loan protection insurance or credit life insurance with the loan. This is not compulsory — the RBI prohibits banks from making insurance a condition of loan sanction. Review whether insurance is bundled and whether it is optional.

9Cross-Default Clause
If you have multiple loans with the same lender, defaulting on one may trigger a default on all. This clause — often buried in the fine print — can have severe consequences for borrowers who hold both a personal loan and a home loan at the same bank.

10Dispute Resolution and Grievance Mechanism
Confirm the designated court jurisdiction, the internal grievance officer's contact, and the RBI Ombudsman escalation path. You have 30 days to get a response from the bank before escalating to the RBI Ombudsman at no cost.