Seven Clauses in a Loan Agreement That You Should be Watchful Of

You are all set to finalise a home loan deal, taking a giant leap towards fulfilling your dreams. The only step now between you and your dream home is to sign a lengthy agreement with your bank to get your loan disbursed. After having researched for a suitable lending partner, most investors exhibit haste at this point to get their loan disbursed and skip past the details of the loan agreement. Moreover, a loan agreement being a lengthy document running into pages, many borrowers do not spend enough time on it and consider it as a formality.

Why you should be watchful

A loan agreement should always be read in detail as it is the final reference for any potential dispute between you and the bank in future. You can ask the bank to give you a soft copy of the agreement beforehand to go through it in detail.

Since loan agreements are drafted by the bank, they keep their interest paramount at all times. Every agreement contains certain clauses which borrowers should understand in detail. Some of these clauses can be even tricky to grasp at first reading.

Here are 7 such clauses that you must understand in detail before signing any loan agreement.

1: Interest fluctuation clause: Interest fluctuation clause gives the bank the right to fix the interest rate as per their base rate fluctuations. If you are seeking a long term loan like a home loan, the bank can alter the rate of interest as and when they change their base rate without seeking your approval. So, it is important to read the terms and conditions of this clause. Many borrowers who took loans before 2010, when the prime lending rate concept was prevalent, were not aware of this possible loophole, just because they were not clear about these terms.

2: Definition of default: If you think default means non-payment of your EMIs, you may be in for a surprise. Different lenders have different definition for the word 'default'. Depending on the lending bank, a defaulter is a broader term used, which implies when the borrower expires or the borrower is divorced (in case of a joint loan), or borrower is involved in any civil or criminal offence. A borrower is also considered as a defaulter in case of a cross default, i.e. when he defaults on any other loan provided any bank or the same bank.

3: Clauses regarding disbursement: If you think that the loan will be disbursed to you only, it may not happen always, as banks disburse the loan as per their disbursement clause. If the bank disbursement clause says direct disbursement to the builder, then the loan will be disbursed directly to the builder and not to you. In case of a balance transfer, it will be made towards the other bank.

4: Force majeure clause: Force Majeure Clause is also known as Money Market Condition clause in some loan agreements. Under this clause, the bank reserves the right to unfix the fixed interest rates for your loan in the event of any unforeseen economic conditions or some extra ordinary circumstances. So if you think that a fixed rate loan will remain fixed forever, it is important to go through this clause to avoid disputes with the bank later.

5: Reset clause: This clause again applies to fixed rate loans. In some fixed rates, there is a reset clause inserted by the bank, reserving their right to reset the rate to a higher level after 2-5 years if interest rates at that time show a rising trend. In some cases, the fixed rate offered will be for a limited period only, and thereafter the bank holds the right to reset it, irrespective of the prevalent trend.

6: Debt collection by third parties: Many lending banks, NBFCs and HFCs have a clause in their loan agreement that they hold the rights to entrust your details including post-dated cheques to any third parties without informing you, for recovery in case of default or dues. Many borrowers who are not aware of this clause tend to get annoyed when they get calls from third parties for loan collection.

7: Amendment clause: Amendment clause gives the bank a right to amend any conditions of the loan without informing you. This is a very tricky clause. Legal experts believe that amendment clause has a big legal loophole as the lending institution can change the terms and conditions without seeking the approval of the borrower. If you notice any amendment clause in your bank loan agreement, read it in detail.

Bank loan agreements may be lengthy documents, but one must take out some time to read in detail before signing. This is because, once signed, you cannot get into a dispute with the bank for alterations if you eventually find them unfavourable.

BankBazaar.com is an online loan marketplace.

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