Tips to read your loan agreement carefully
A loan agreement is not only a statement of facts, but also defines the scope of the contract in terms of charges, interest rates, term, risks, and various clauses. Hence, it is essential to understand the clauses, terms, and conditions under which you have been granted the loan.
There is a 99.99 percent chance that in a rush to seal your deal, you missed the above-mentioned disclaimer in your home loan document. Besides, the bond runs into 50 pages and consists of legal jargon that are, more often than not, beyond your grasp. So, if a thought like 'why read when everyone signs the same document?' crosses your mind, you're not alone. However, it is not something that we should ignore. After all, there is a whole lot of 'potential dynamites' in all banks' home loan agreements.
Why is it essential?
According to Sachin Chaudhary, COO, Indiabulls Housing Finance Ltd, a borrower must go through his/her agreement and be aware of all the terms of the loan. He further says: A borrower should know what s/he is agreeing to and for how long the agreement will last. Read the agreement carefully to understand concepts such as loan amount, rate of interest, tenure, nature of rate, etc; Also, a borrower must be aware of the lender's conditions mentioned in the loan agreement so that knowingly or unknowingly, s/he does not breach those conditions; Detailed study of the loan agreement educates a borrower on options in case of an emergency or exigency, and what action can be taken within agreed terms of agreement.
It's all in the details: While we cannot press enough on the importance of reading the agreement thoroughly before signing it, below are the top four clauses, which form a part of most loan agreements. These are a must for every borrower to understand in detail as they have a direct bearing on the interest rates and repayment schedules, thus impacting financial terms significantly.
Interest spread clauses: Banks charge a spread over the MCLR, which usually remains constant over the period of the loan. However, there may be a reset clause that allows the lender to reset the spread of the loan, between 25 to 75 bps. However, at times, there may be special offers or discounts, which bring down the spread. And a change in the spread can change the rate of interest at which you repay the loan. So you should pay attention to when the lender could revise the spread and under what conditions.
Prepayment clause: Most banks and HFCs cannot impose any penalties on prepayment. However, there may be certain other conditions governing prepayment such as the number of prepayments you can make in a year or even throughout the loan period, the minimum amount you can prepay, etc.
Clauses allowing amendments to the agreement: Such clauses give the lender the power to unilaterally alter the terms of the agreement. The borrower must ensure that their written consent is required to alter any of the terms of the loan agreement.
Clauses on default: Default generally means not paying your EMI. However, the term can have other meanings, such as any civil or criminal offence on the borrower, death of the borrower, divorce of the co-applicants of the loan, or even default on any other loan taken by the borrower. Understand these terms carefully.
Navin Chandani, Chief Business Development officer, BankBazaar
Where it could hurt you the most…
It is not the high rate of interest but the sudden uninformed changes in the clauses that could hurt you in the long-run. Shivam Sinha, CEO, Indias setz, points out the top three clauses, which directly impact the quantum of principal loan amount (outstanding at any point of time), should the borrower decide to pre-close the loan:
• Interest rate fluctuation clause: It gives the bank the right to alter the fixed interest rates basis their base rate change without seeking the consent of the borrower
• Reset clause: It entitles the lender to increase the fixed interest rates after a stipulated period of time to absorb the increase in market rates in the future, thus increasing the loan rates significantly
• Security cover clause: It entitles the lender to call on the customer to provide additional security and safeguard the outstanding home loan amount in case of fall in property rates. Inability or unwillingness of the borrower to pay the same could deem him/her as a defaulter and thus, face legal implications.