Understanding the important clauses in a loan agreement is vital. A loan agreement is a complex document, and it is an agreement with the bank, that the customers sign to get their home loan disbursed. Many borrowers consider this step to be a mere formality and tend to neglect what is said in this lengthy document.
The agreement is drafted by the bank and therefore it is natural that it is their interest which is kept paramount in the document. However, it is important for the customer to read the loan agreement in detail and be mindful of specific clauses in the agreement. This would serve to prevent disputes and ensuing heartaches in the future. Read on to find out a few of the important clauses in a loan agreement that customers have to read in detail and be mindful of before signing on the dotted line when applying for a home loan.
It is a good idea for the customer to ask for a soft copy of the agreement and go through the terms and conditions of the loan agreement carefully.
This clause basically gives the permission to the bank to alter interest rates based on their base rate fluctuations. When a customer takes a long-term loan like a housing loan, the bank is free to alter the rates of interest without seeking the customer’s permission. This may be done when the banks’ alter their base rates of interest. A customer that availed of a loan before the year 2010 may not be aware of this clause that was implemented later on. In the period prior to this, the prime lending rate was applicable for home loans.
Though commonly default is understood as non-repayment of loans availed from the bank, different banks have different definitions for default. In broader terms, defaulter can mean that the borrower has expired or is divorced, the latter being applicable in the case of a joint loan. It can also mean that the borrower is involved in a civil or criminal case. A cross-default is one in which the borrower had not repaid back the loan that he owes to any other bank.
This clause specifies the cover to be provided for the loan for the entire tenure of the loan. It is usual for the property to be purchased to be assigned as security for the loan that is provided. However, in case this is insufficient, which may happen due to fall in prices in the market, the lender can ask for additional security as the cover for the outstanding amount to the bank.
Most home loans are disbursed directly to the builder and not to the customer. Therefore the customer should ensure to read this clause carefully before making any surmises and plans. In case it is mentioned that a balance transfer will be made, the money will be transferred to another bank.
This clause is also known by the name Money Market Condition clause. According to this clause, the bank reserves the right to change fixed rates of interest in case of extraordinary circumstances or in the case of economic circumstances beyond any control. Therefore it is not true that a fixed interest rate will remain ‘fixed’ forever. This clause has to be read and understood in entirety to avoid any disputes with the bank at a later point in time.
This is yet another clause that applies to fixed rates of interests. Banks reserve the right to change the fixed rates of interests after a period of 2 to 5 years if, at that time, the interest rates show an increasing trend. In certain other cases, a fixed rate of interest is allowed only for a specified period of time. After this period, the bank has the right to change the rate, no matter what the trend is at that point in time.
The word ‘prepayment’ refers to making a repayment in excess of the EMI amount that is specified in the agreement. Generally, these excess amounts are adjusted against the outstanding principal amount when the payment is made. The prepayment amount may only be a fraction of the loan amount or the amount in full. The clause stipulates the financial implications of such prepayments that are to be made.
Any repayment that is made by the customer towards the loan that is first adjusted against any other dues that are outstanding such as late payment fees, penalty, transaction fees, etc. only after completely recovering these dues, is the amount adjusted against the EMI payment or repayment of the principal loan amount.
In case the borrower defaults payment of the loan to the financial institution such as banks, housing finance companies or NBFCs, they reserve the rights to share your personal details with third parties of their choice for the purpose of repayment of the loan. There are many borrowers that do not know the existence of such a clause and get annoyed when they receive calls from such third parties asking for repayment of dues.
This clause gives the right to the financial institution to amend any clause in the loan agreement that they want without informing the borrower. Any amendment clause should be read in great detail and understood properly.
The customer has to duly inform the lender any change in residential address, change of employment or profession or business, change in residential status, change in income levels, etc., during the tenure of the loan. The time-frame within with this information has to be notified and the mode of notification is specified in the clause.
It is always important to understand that only a few aspects of the loan agreement such as the tenure of the loan and the interest rates, etc., can be negotiated with the lender. The customer, therefore, has to critically examine and understand all important clauses of the loan agreement before putting their signature on the paper.
If you need more information on this topic, do checkout our extensive home loan guide for first time home buyers in India.
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