Loan App Late Fees and Penal Charges: What RBI Allows and How to Challenge Them
You borrowed ₹8,000 from an instant loan app, missed the due date by a couple of weeks, and now the app says you owe ₹13,500. Where did the extra money come from? In most cases the answer is loan app late payment charges and penal fees, often stacked on top of interest, GST and "bounce" charges. The good news is that RBI rules put real limits on how regulated lenders can charge penalties, and knowing those limits gives you a much stronger position when you ask for a waiver or negotiate a settlement.
This guide explains, in plain English, what RBI allows on late fees and penal charges, the red flags that suggest you are being overcharged, and a step-by-step way to challenge charges calmly and in writing.
Why loan app dues grow so fast after a missed payment
Most payday-style loan apps lend small amounts for short tenures of a few days to a few weeks. When you miss the due date, several things can start at once:
Regular interest keeps running on the unpaid principal.
A late payment or penal charge is added, sometimes as a flat amount and sometimes per day.
If an auto-debit (e-NACH) mandate fails, your bank may charge a bounce fee, and the lender may add its own charge.
GST is applied to many fees and charges.
If you borrow from a second app to repay the first, a new set of fees begins.
Each item may look small on its own. Together, on a short-tenure loan, they can add a large share of the original amount within weeks. That is why it is worth checking every line, not just the total.
What RBI rules say about penal charges
The key rule is RBI's circular "Fair Lending Practice – Penal Charges in Loan Accounts", issued on 18 August 2023 and effective from 1 January 2024. It applies to commercial banks (including small finance banks and regional rural banks), co-operative banks, all NBFCs and certain all-India financial institutions. Credit cards are covered by separate rules and are excluded. Here is what it requires, in simple terms.
1. Penalties must be "penal charges", not "penal interest"
Lenders cannot punish a missed payment by quietly raising your interest rate. Any penalty for breaking a material term of the loan must be a separate penal charge, not an extra interest rate added on top of the loan rate.
2. No interest on penal charges
RBI says there shall be no capitalisation of penal charges. That means the lender cannot add the penalty to your principal and then charge interest on it. Normal interest on the loan itself continues, but interest on the penalty amount is not allowed.
3. Charges must be reasonable
The amount must be "reasonable and commensurate" with the non-compliance, and lenders must apply it without discrimination within a loan or product category. For loans to individuals for non-business purposes, penal charges cannot be higher than those applied to non-individual borrowers for similar non-compliance.
4. Charges must be disclosed and communicated
The quantum and reason for penal charges must be clearly stated in the loan agreement and in the Key Fact Statement (KFS). Lenders must also display them on their website. When a lender sends you a reminder about a missed payment, it must mention the applicable penal charges, and when it actually levies a charge, it must tell you the charge and the reason.
5. Nothing outside the KFS without your consent
Separately, RBI's Key Fact Statement directions (issued in April 2024 and applicable to retail and MSME loans from 1 October 2024) say that fees and charges not mentioned in the KFS cannot be charged to you at any stage of the loan without your explicit consent. For digital loans, the KFS must also show the Annual Percentage Rate (APR), which captures the all-in cost. If you want to understand APR in more depth, our guide on loan app interest rates, APR and hidden charges explains it with examples.
Red flags that you may be overcharged
These signs do not prove wrongdoing on their own, but they are good reasons to ask questions in writing:
The penalty is shown as a higher interest rate after the due date instead of a separate charge.
Your outstanding keeps rising faster than the penal charge stated in your KFS would explain, which may mean interest is being calculated on penalties.
A charge appears that is not listed anywhere in your KFS or loan agreement.
Reminders and recovery messages never mention what the penal charge actually is.
The app refuses to share an itemised statement or a copy of the KFS.
The "lender" behind the app cannot be identified, or is not a bank or RBI-regulated NBFC.
That last point matters most. RBI's rules bind regulated lenders. If the app is not linked to any regulated entity, it may be operating illegally, and the right steps are different. Our guide on what to do if you borrowed from an illegal loan app covers that situation.
How to check your charges, step by step
Set aside 30 minutes, a notebook and your phone. Work through these steps one loan at a time.
Step 1: Find your KFS and loan agreement
Look in the app's "My loans" or "Documents" section, and search your email and SMS for the sanction letter or KFS sent at the time of disbursal. Note the name of the regulated lender, the loan amount, processing fee, interest rate, APR, due date and the penal charges stated.
Step 2: Ask for an itemised statement
Request a statement that splits your outstanding into principal, interest, penal charges, bounce charges and GST, with dates. A short, polite email works best. For example: "Please share an itemised statement of my loan account showing principal, interest, penal charges and other fees separately, along with a copy of my Key Fact Statement."
Step 3: Compare the two
Check whether each charge on the statement matches what the KFS allows. Look in particular for interest being charged on penal amounts, charges that are not in the KFS, and duplicate bounce fees for the same failed debit.
Step 4: Write to the grievance redressal officer
Every regulated lender must name a grievance redressal officer, and the contact details should be in the app, on the website and in your loan documents. Write a short complaint listing the specific charges you dispute and why, attach screenshots, and ask for a correction or waiver. Keep the tone factual, not angry, and save a copy.
Step 5: Escalate to the RBI Ombudsman if needed
If you get no reply within 30 days, or you are not satisfied with the reply, you can complain under the RBI Integrated Ombudsman Scheme through the Complaint Management System at cms.rbi.org.in. RBI's FAQs state that the complaint should be filed within 90 days of the 30-day period ending or of the lender's last reply, whichever is later. RBI's contact centre on toll-free 14448 can guide you on the process, though complaints cannot be filed over the phone. Our step-by-step guide on how to complain against a loan app in India explains every route.
Asking for a penal charge waiver
Even when charges are technically within the rules, many lenders will consider reducing or waiving penal charges if you show a genuine willingness to repay. A waiver is a goodwill decision by the lender, not a right, so there is no guarantee. These tips help:
Explain the reason for the delay briefly and honestly, such as a delayed salary, job loss or medical emergency.
Offer a concrete plan, for example repaying the full principal and interest by a specific date if penal charges are waived.
Ask for any agreement in writing from the lender's official email or letterhead before you pay.
Pay only through the official app, the lender's bank account or a payment link you have verified, never to an agent's personal UPI ID.
After payment, request a no dues certificate or closure letter.
When charges are too high to repay: settlement
Sometimes, even after corrections, the total is more than you can realistically pay, especially if you have several apps running at once. In that case, a one-time settlement may be an option. In a settlement, the lender agrees to accept a reduced amount to close the account. It is a negotiation, the outcome depends on the lender and your situation, and no one can promise a particular discount.
Settlement has a cost too. A settled loan is usually reported to credit bureaus as "settled" rather than "closed", which lowers your CIBIL score and can make borrowing harder for some years. For many borrowers who cannot repay in full, it is still a practical way to stop the charges growing and move on. Our payday loan settlement service page explains how the process works.
An illustrative example
This is an illustrative example, not a real client story. Imagine a delivery partner in Hyderabad who borrowed ₹8,000 from an app linked to a registered NBFC. After a two-week delay, the app showed a much higher outstanding. He asked for his KFS and an itemised statement and found that a per-day penal charge had also been treated as part of the amount on which interest was calculated. He wrote to the grievance officer quoting the RBI penal charges rule, and the lender recalculated the account. He then repaid the corrected amount in two instalments agreed in writing.
Mistakes to avoid
Ignoring the problem. Charges usually keep building while you wait.
Borrowing from another app to pay penalties. This often doubles the problem within weeks.
Arguing on recovery calls. Keep calls short and move the discussion to email.
Paying "settlement" amounts to unknown agents without a written offer from the lender.
Deleting the app before saving your KFS, statements and payment receipts.
How Payday Rescue helps
Payday Rescue is a Bengaluru-based debt resolution advisory that helps borrowers across India deal with payday loans, instant loan app debt, unsecured personal loans and credit card dues. When charges have spiralled, here is how we can help:
A free, confidential first consultation to understand every loan, its charges and your monthly budget.
Help reviewing your KFS and statements to spot charges worth questioning.
Guidance on writing to grievance officers and escalating through the right channels.
Negotiation with lenders for waivers, revised plans or one-time settlements where repayment in full is not possible.
Guidance on your rights if recovery agents harass you during the process.
We follow RBI fair-practice guidance in how we advise borrowers. Payday Rescue is not a law firm, and we cannot guarantee any waiver or outcome. Our fees are explained clearly before enrolment, so you know exactly what you are agreeing to. Call or WhatsApp +91 98865 50910, or email support@paydayrescue.in.
Frequently asked questions
Can a loan app charge interest on late fees?
Not if it is a regulated lender following RBI's penal charges rules. RBI says penal charges must not be capitalised, which means no further interest should be computed on them. Regular interest on the unpaid loan can continue.
Is there a fixed maximum late fee for loan apps?
RBI's penal charges rule does not set a single rupee cap. It requires charges to be reasonable, commensurate with the default, disclosed in the KFS and loan agreement, and communicated to you. Each lender must follow its board-approved policy within these principles.
Can I get penal charges waived?
You can ask, and many lenders consider waivers when you show a genuine hardship and a clear plan to repay. A waiver is at the lender's discretion, so get any agreement in writing before paying.
Will settling a loan because of high charges affect my CIBIL score?
Yes. A settled account is usually reported as "settled", which affects your CIBIL score and future loan approvals. Full repayment, even late, is generally better for your credit history if you can manage it.
This article is general information and not legal or financial advice.
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