Penal Interest

Penal Interest (also called penalty interest or default interest) is an additional rate of interest charged by the lender when the borrower fails to pay EMIs or violates other loan agreement terms.

It is a punitive charge meant to discourage delays and defaults in loan repayment. While RBI has issued guidelines limiting penal interest rates, they can still significantly increase the cost of a loan if payments are delayed. What is Penal Interest? If your home loan EMI is due on the 5th of each month and you pay it on the 20th, the bank may charge penal interest for the 15 days of delay. Penal interest rates are typically 1% to 2% per month over and above the normal interest rate. So if your normal rate is 8.5%, the penal rate would be 9.5% to 10.5% per annum for the period of default. The calculation of penal interest varies by bank. Some banks charge it only on the delayed portion of the EMI, while others charge it on the entire outstanding loan amount from the date of default. The RBI has directed banks to cap penal interest at 1% per month (12% per annum) over and above the normal rate for retail loans, though this cap has been periodically updated. For example, on a ₹30 lakh home loan with an EMI of ₹23,000, a 15-day delay might attract penal interest on ₹23,000 at 1% per month (approximately ₹76 for 15 days). While ₹76 may seem small, if delays become habitual, the accumulated penal interest and the impact on your credit score can be far more damaging. Beyond penal interest, defaulting on loan EMIs also affects your credit score. A single delay of 30 days or more is reported to credit bureaus (CIBIL, CRIF) and can reduce your credit score by 50 to 150 points. Multiple defaults make it difficult to get future credit at favourable terms — banks may either reject your application or offer a much higher interest rate. The best way to avoid penal interest is to set up an auto-debit (NACH/Standing Instruction) on your salary account a few days before the EMI due date, with enough buffer to handle bank holidays and processing delays. If you anticipate payment difficulty, proactively contact the bank before the due date to negotiate a restructuring or EMI modification rather than defaulting. Remember that penal interest and credit score damage are far more costly than the temporary financial difficulty.