You have finalized your new property, shortlisted your lender and the bank’s executive has briefed you about the loan agreement. Now, loan disbursal is just a few signatures away.
Is everything perfectly in place? Not really.
Weren’t you about to skip that lengthy loan agreement?
This is a crucial step where most of the borrowers falter. Your days of search for best lender and low interest rates may go down the drain if you act in haste at this stage. As the loan agreement runs into pages, most of the borrowers do not bother to go into minute details.
Read between the lines
It is important to go through the details of the loan agreement as it is the last document to ensure that there is no dispute or misunderstanding about the terms and conditions of loan.
You can ask your bank for a soft copy of the loan agreement so that you can take your time to go through the fine print.
As banks offer loan to make money and loan agreements are drafted by banks, the tilt is always in the lender’s favour. Borrowers need to understand the details of the agreement to avoid unpleasant situations.
What to watch out for?
Following are the clauses that you should go through before signing the loan agreement:
Reset clause on fixed rates
Banks insert a reset clause in fixed rate loans through which they review and revise interest rates after every 2-5 years. A borrower may face a piquant situation if he is not aware of this clause as it is commonly believed that fixed rate means a single rate of interest for the entire loan tenure. At a time when interest rates are high, this clause gives banks an opportunity to increase the interest rate.
Interest fluctuation clause
Under this clause, the bank reserves the right to fix interest rate as per the fluctuations in base rate. Whenever a bank changes it base rate, it also alters the interest without the borrowers’ approval.
Definition of a defaulter
It is a common perception that default only means non-payment of monthly installments. However, banks define ‘default’ in a broader term which includes situations such as borrower’s death, divorce (in case of joint loan), or involvement in a civil/criminal case. A borrower can be termed as defaulter even if he fails in repayment of any other loan taken from the same or any other lender.
Money market condition clause
Under the money market condition or Force Majeure clause, your lender can hike interest in fixed rate loan in “extraordinary economic conditions”. This means that your fixed rate loan may not be fixed forever. Therefore, you should ask your bank to clarify the term ‘exceptional circumstances’ so that you may guard against ‘semi-fixed’ loans under the garb of fixed rate loan.
Disbursement clause
Your bank may not necessarily disburse loan amount to you, therefore, you must go through this clause properly. The bank may disburse loan amount directly to the builder, if the clause says so. In case of balance transfer, the loan amount is transferred to the new bank.
Debt collection
Many lenders state in the agreement that they may entrust a third party the task of recovery in case of a default. You should clarify with your bank on this point to avoid any inconvenience.
Clause related to amendment of conditions
Amendment clause is the trickiest clause in loan documents. Under this, your bank may change the terms and conditions anytime without prior information. One should not overlook this clause and seek necessary clarifications beforehand.
