Finance
Reading a Loan Sanction Letter: The Charges That Are Not the Interest Rate
Since 1 October 2024 every retail loan comes with a Key Facts Statement that must list every charge and state the annual percentage rate. Anything not in it cannot be charged. Here is what each line is.
By Nina Shah · Updated · 9 min read
Short answer
What is a Key Facts Statement for a loan?
Under the RBI's circular of 15 April 2024, every retail and MSME term loan sanctioned from 1 October 2024 must come with a Key Facts Statement in a standard format that states the annual percentage rate - the true cost including every charge the lender levies - alongside the loan amount, repayment schedule, penal charges, foreclosure terms, the sanction's validity window and the grievance route. Third-party charges collected by the lender, such as insurance or legal fees, must be disclosed separately and included in the APR. Any charge not in the KFS cannot be levied during the loan without the borrower's explicit consent. The lines that most often surprise borrowers are the processing fee with GST, valuation and legal fees on secured loans, bundled insurance that is optional and cannot be made a condition, state stamp duty and mortgage registration on home loans, the rate reset clause on floating loans, and penal charges, which since April 2024 must be a fee rather than a higher interest rate and cannot be capitalised.
Our practical verdict
A sanction letter is a lender's offer, and for years it was written to be signed rather than read. The Reserve Bank's Key Facts Statement changed that. Since 1 October 2024 every retail and MSME term loan has come with a KFS in a standard format, and the KFS carries the one rule that makes the rest of the document readable: any charge not in it cannot be levied during the loan without your explicit consent.
Start with the annual percentage rate. It is the true cost of the loan with every lender charge included, and it is why a loan advertised at 8.5 percent shows an APR of 9 or more. Two lenders' headline rates tell you little; their APRs, computed the same way on the same standard form, are comparable. The KFS attaches a computation sheet so that you can see what went into the number.
Then the charges, one by one. The processing fee is a percentage of the loan and attracts GST at 18 percent on top, so a 0.5 percent fee on Rs 50 lakh is Rs 25,000 plus Rs 4,500 in tax; it is also the one charge lenders negotiate on, and festive waivers of it are real. Valuation, legal and CERSAI charges on a secured loan are third-party costs that the KFS must show separately. Stamp duty and mortgage registration on a home loan are state charges the lender cannot waive, often tens of thousands of rupees, and payable at disbursement rather than folded into the loan.
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Pick 1
The APR is the number to read first
The Key Facts Statement must state an annual percentage rate that includes every charge the lender levies, which is why a loan advertised at 8.5 percent can carry an APR of 9 or more. Compare lenders on the APR in their KFS, not on the headline rate on the hoarding. The KFS also carries a computation sheet that shows how the APR was arrived at.
Pick 2
Processing fee, and the GST on it
Usually a percentage of the loan, sometimes capped, and always attracting 18 percent GST that is charged on top. On a Rs 50 lakh home loan a 0.5 percent fee is Rs 25,000 plus Rs 4,500 GST. Festive waivers of the processing fee are real and are the one charge that lenders negotiate on; ask.
Pick 3
Third-party charges must be listed separately
Valuation and legal fees on a secured loan, CERSAI registration, and any insurance the lender collects on behalf of an insurer are third-party charges. The KFS must show them separately and include them in the APR. If a charge appears at disbursement that was not in the KFS, the lender needs your explicit consent to levy it, and you can decline.
Pick 4
Bundled insurance is optional
Loan protection or property insurance sold alongside the loan is frequently presented as a condition. It is not. The lender may require the property to be insured; it cannot require you to buy that insurance from its partner, and a policy premium folded into the loan amount attracts interest for the full tenure. Read this line, and see the term insurance guide for what actually protects a loan, and the insurance claim rejection guide for why a policy bought this way can fail when it is claimed.
Pick 5
Stamp duty, mortgage registration and the state
On a home loan, stamp duty and mortgage registration are state charges that vary widely and are not the lender's to waive. They can run to tens of thousands of rupees and are due at disbursement. The KFS lists them; the sanction letter often does not make clear that they are payable up front.
Pick 6
The rate reset clause on a floating loan
A floating-rate loan is linked to a benchmark, and the KFS states which one, the spread over it, and how often the rate resets. Many lenders charge a conversion or switch fee to move a borrower to a lower spread later, and that fee is in the KFS too. What the spread is, and what it costs to change it, decides the loan's cost over a decade far more than the rate on day one. The prepayment guide covers what a floating loan lets you do without charge.
Pick 7
Penal charges, since April 2024
The RBI's rules effective 1 April 2024 require penalties for a missed payment or a broken condition to be a penal charge, a fee, rather than penal interest added to the rate, and bar the charge from being capitalised so that it cannot itself attract interest. The KFS states the charge. A sanction letter still describing penal interest describes a term the lender can no longer apply.
Which option should you choose?
The APR is the number to read first
The Key Facts Statement must state an annual percentage rate that includes every charge the lender levies, which is why a loan advertised at 8.5 percent can carry an APR of 9 or more. Compare lenders on the APR in their KFS, not on the headline rate on the hoarding. The KFS also carries a computation sheet that shows how the APR was arrived at.
Processing fee, and the GST on it
Usually a percentage of the loan, sometimes capped, and always attracting 18 percent GST that is charged on top. On a Rs 50 lakh home loan a 0.5 percent fee is Rs 25,000 plus Rs 4,500 GST. Festive waivers of the processing fee are real and are the one charge that lenders negotiate on; ask.
Third-party charges must be listed separately
Valuation and legal fees on a secured loan, CERSAI registration, and any insurance the lender collects on behalf of an insurer are third-party charges. The KFS must show them separately and include them in the APR. If a charge appears at disbursement that was not in the KFS, the lender needs your explicit consent to levy it, and you can decline.
Bundled insurance is optional
Loan protection or property insurance sold alongside the loan is frequently presented as a condition. It is not. The lender may require the property to be insured; it cannot require you to buy that insurance from its partner, and a policy premium folded into the loan amount attracts interest for the full tenure. Read this line, and see the term insurance guide for what actually protects a loan, and the insurance claim rejection guide for why a policy bought this way can fail when it is claimed.
Stamp duty, mortgage registration and the state
On a home loan, stamp duty and mortgage registration are state charges that vary widely and are not the lender's to waive. They can run to tens of thousands of rupees and are due at disbursement. The KFS lists them; the sanction letter often does not make clear that they are payable up front.
The rate reset clause on a floating loan
A floating-rate loan is linked to a benchmark, and the KFS states which one, the spread over it, and how often the rate resets. Many lenders charge a conversion or switch fee to move a borrower to a lower spread later, and that fee is in the KFS too. What the spread is, and what it costs to change it, decides the loan's cost over a decade far more than the rate on day one. The prepayment guide covers what a floating loan lets you do without charge.
Penal charges, since April 2024
The RBI's rules effective 1 April 2024 require penalties for a missed payment or a broken condition to be a penal charge, a fee, rather than penal interest added to the rate, and bar the charge from being capitalised so that it cannot itself attract interest. The KFS states the charge. A sanction letter still describing penal interest describes a term the lender can no longer apply.
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| Situation | Best starting point | Final check |
|---|---|---|
| The APR is the number to read first | The Key Facts Statement must state an annual percentage rate that includes every charge the lender levies, which is why a loan advertised at 8.5 percent can carry an APR of 9 or more. Compare lenders on the APR in their KFS, not on the headline rate on the hoarding. The KFS also carries a computation sheet that shows how the APR was arrived at. | Use this as a shortlist, then verify the final details before committing. |
| Processing fee, and the GST on it | Usually a percentage of the loan, sometimes capped, and always attracting 18 percent GST that is charged on top. On a Rs 50 lakh home loan a 0.5 percent fee is Rs 25,000 plus Rs 4,500 GST. Festive waivers of the processing fee are real and are the one charge that lenders negotiate on; ask. | Use this as a shortlist, then verify the final details before committing. |
| Third-party charges must be listed separately | Valuation and legal fees on a secured loan, CERSAI registration, and any insurance the lender collects on behalf of an insurer are third-party charges. The KFS must show them separately and include them in the APR. If a charge appears at disbursement that was not in the KFS, the lender needs your explicit consent to levy it, and you can decline. | Use this as a shortlist, then verify the final details before committing. |
| Bundled insurance is optional | Loan protection or property insurance sold alongside the loan is frequently presented as a condition. It is not. The lender may require the property to be insured; it cannot require you to buy that insurance from its partner, and a policy premium folded into the loan amount attracts interest for the full tenure. Read this line, and see the term insurance guide for what actually protects a loan, and the insurance claim rejection guide for why a policy bought this way can fail when it is claimed. | Use this as a shortlist, then verify the final details before committing. |
Read the editorial notes
Two lines deserve suspicion. Insurance bundled with the loan is presented as a condition and is not one: the lender may require the asset to be insured but cannot require you to buy the cover from its partner, and a premium folded into the loan amount attracts interest for the whole tenure. And penalties, since 1 April 2024, must be a penal charge - a fee - rather than penal interest added to your rate, and cannot be capitalised. A sanction letter still describing penal interest describes a term the lender may no longer apply.
On a floating-rate loan the line that matters most over a decade is the reset clause: the benchmark the rate is linked to, the spread over it, and what the lender charges to move you to a lower spread later. That conversion fee is in the KFS. So is the foreclosure position, which for floating-rate loans to individuals is now simple, and the prepayment guide covers it.
Read the KFS before the sanction letter, compare lenders on the APR, decline anything not in the KFS, and treat bundled insurance as the separate purchase it is. The document was redesigned to be read. It is worth taking it up on the offer.
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FAQ
What is a Key Facts Statement for a loan?
A standard-format document the RBI has required with every retail and MSME term loan since 1 October 2024, stating the annual percentage rate including all charges, the repayment schedule, penal charges, foreclosure terms and the grievance route. Charges not in it cannot be levied without your consent.
Why is the APR higher than the interest rate on my loan?
Because the APR includes the processing fee, third-party charges such as valuation and legal fees, and any insurance the lender collects, spread over the loan. The headline rate is the interest alone.
Can a bank force me to buy insurance with a loan?
No. A lender may require a secured asset to be insured, but cannot require you to buy the policy from its partner, and a bundled premium added to the loan attracts interest for the full tenure.
What are penal charges on a loan?
Since 1 April 2024 a penalty for a missed payment must be a fee, not a higher interest rate, and cannot be capitalised. The amount is stated in the Key Facts Statement.
This guide is educational and not financial advice. Charges, fees and reset terms are set by each lender and are stated in its Key Facts Statement; the figures here are illustrative.
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Nina writes about everyday money decisions, credit cards, calculators, and transparent personal finance tools.
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How Choice IQ evaluated this guide
Choice IQ explains Indian loan sanction letters through the RBI's Key Facts Statement mandate of October 2024: the APR, processing and third-party charges, optional bundled insurance, state duties on home loans, floating-rate reset and conversion fees, and the April 2024 penal-charge rules.
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