Penal interest

Penal interest is typically higher than the regular interest rate, reflecting the extra risk and costs lenders face when payments are delayed.

The main reasons for penal interest are:

Encouraging Timely Payments: The higher cost of late payments motivates borrowers to pay on time.

Compensating for Risk: Late payments introduce uncertainty, and the penalty helps offset the risk.

Covering Extra Costs: Managing overdue payments often requires more work, which the penalty helps cover.

Calculation of Penal Interest

The way penal interest is calculated can vary depending on the loan terms, but common methods include:

Fixed Percentage: A set percentage of the overdue amount. For example, if you owe ₹100,000 and the penal interest is 2%, you would pay ₹2,000 in penal interest.

Daily/Monthly Rate: The penalty can be charged daily or monthly. For example, at a daily rate of 0.05%, if you’re 30 days late on a ₹100,000 loan, you would pay ₹1,500 in penal interest.

Compound Interest: In some cases, penal interest can be compounded, meaning it’s calculated on both the original loan amount and any previous penalties.