A loan is a promise to send the same amount of money out every month for years. Everything else, the rate, the fees, the app, the offer letter, is a way of describing that outflow, and some descriptions hide more than others. This module computes the outflow, prices a flat rate and a card balance, reads how credit information companies work under RBI's rules, sets prepaying against investing with the tax counted, and reads RBI's rules for loans against securities, gold loans and digital lending. This is education, not advice for your money.
- The outflowEMI, tenor and the interest inside it.
- The true rateAPR on a reducing balance, fees counted.
- The recordWhat the credit report holds and who must fix it.
- The choicePrepay or invest, after tax.
The order of this module. Secured loans and digital lending come after the arithmetic.
5By the end you can
- Compute an EMI, split it into interest and principal, and read an amortisation schedule.
- Convert a flat rate to its reducing balance equivalent and read an APR in RBI's Key Fact Statement.
- Price a credit card balance carried month to month, and say what RBI's card rules require of the issuer.
- Say what a credit information company holds, how often it is updated, what the free report is and how a wrong entry is corrected.
- Compare prepaying a loan with investing, after tax, and read RBI's rules for loans against securities, gold and digital lending.
3 terms this section turns on
EMI maths and amortisation
An equated monthly instalment, in RBI's words, is an equated or fixed amount of repayment, consisting of both the principal and interest component, paid at periodic intervals for a fixed number of intervals, which results in complete amortisation of the loan (Reserve Bank of India (Commercial Banks, Responsible Business Conduct) Directions, 2025, updated as on 1 Oct 2026). The amount is fixed. The split inside it is not.
r = annual rate / 12
Interest this month = r x balance
Principal this month = EMI - interest
Read one more paragraph, 69 words
RBI's own illustration shows the shape. For a hypothetical retail loan of ₹20,000 over 24 months at 15%, its Key Fact Statement annex gives an EMI of ₹970 (₹969.73 unrounded) and total interest of ₹3,274. Its schedule starts with ₹720 of principal and ₹250 of interest in the first instalment, then ₹729 and ₹241 in the second, and the interest part keeps shrinking. The formula gives the same ₹969.73.
A home loan, worked month by month
An illustration with invented inputs: ₹50,00,000 at 9% a year over 20 years, so r = 0.75% and n = 240. The EMI is ₹44,986. Over the full term the borrower pays ₹44,986 x 240 = ₹1,07,96,711, of which ₹57,96,711 is interest, more than the amount borrowed.
| EMI number | Interest in it | Principal in it | Balance after |
|---|---|---|---|
| 1 | ₹37,500 | ₹7,486 | ₹49,92,514 |
| 12 | ₹36,859 | ₹8,128 | ₹49,06,364 |
| 60 (year 5) | ₹33,352 | ₹11,634 | ₹44,35,352 |
| 120 (year 10) | ₹26,771 | ₹18,215 | ₹35,51,294 |
| 180 (year 15) | ₹16,467 | ₹28,519 | ₹21,67,142 |
| 240 (year 20) | ₹335 | ₹44,651 | ₹0 |
Interest in it: the largest is 1 at ₹37,500
Read one more paragraph, 51 words
Read the table sideways. In the first instalment 83% of the money is interest. After five years the borrower has paid ₹21,34,530 of interest and cut the balance by ₹5,64,648, 11.3% of the loan. Interest is charged on a large balance early, which is why an early prepayment saves the most.
Tenor and rate: what moves the cost
A longer tenor lowers the EMI and raises the total interest. On the same ₹50 lakh at 9%:
- 15 years, EMI ₹50,713₹41.28 lakh
- 20 years, EMI ₹44,986₹57.97 lakh
- 25 years, EMI ₹41,960₹75.88 lakh
Total interest on ₹50,00,000 at 9%. Illustration with invented inputs, computed by the EMI formula above.
Read one more paragraph, 106 words
The 25 year EMI is ₹8,753 (17%) lower a month than the 15 year one and costs ₹34.6 lakh more in interest. The rate matters in the same way: at 8.5% the 20 year EMI is ₹43,391, at 9% it is ₹44,986 and at 9.5% it is ₹46,607. Half a percentage point is about ₹1,600 a month, ₹3.9 lakh over 240 months. A household can place the EMI against the sheet from module 20.1. The EMI above is 41.7% of the sheet's ₹1,08,000 inflow, against the 20.4% that household saves. No rule of RBI or SEBI sets an acceptable ratio, so the sheet is the test.
Flat rate versus reducing balance rate
A reducing balance rate is charged on the principal still outstanding, which is how the EMI formula works. A flat rate is charged on the original principal for the whole term, as if nothing had been repaid. The same headline number means very different costs.
| Basis | EMI | Interest over 3 years |
|---|---|---|
| 10% reducing balance | ₹16,134 | ₹80,809 |
| 10% flat | ₹18,056 | ₹1,50,000 |
Three numbers to read on any loan offer: the APR on a reducing balance, the net amount that reaches the account after fees, and the total repaid. A rate quoted without them cannot be compared with another rate.
Read 3 more paragraphs, 234 words
An illustration. ₹5,00,000 for 3 years at 10% flat: interest is 5,00,000 x 10% x 3 = ₹1,50,000, the total payable is ₹6,50,000 and the EMI is ₹6,50,000 / 36 = ₹18,056. At 10% reducing, the EMI is ₹16,134 and the interest ₹80,809.
The flat loan costs ₹69,191 more. Its true annual rate is the rate at which 36 instalments of ₹18,056 repay ₹5,00,000, found by the trial method of module 20.2: 17.92% a year, about 1.8 times the headline. The borrower repays principal each month but keeps paying interest as if none had been repaid.
RBI's disclosure rules are written to expose this. For new retail and MSME term loans sanctioned on or after 1 October 2024, a bank must give a Key Fact Statement in a standard format, valid for at least three working days for a loan of seven days or more. It includes a computation sheet for the Annual Percentage Rate, which is the annual cost of credit including interest rate and all other charges, and the full amortisation schedule (Responsible Business Conduct Directions, 2025, paragraph 348 and Annex XIII). In RBI's ₹20,000 illustration, the stated rate is 15%, fees of ₹400 are charged, the net disbursed amount is ₹19,600, and the APR is 17.07%, "computed on net disbursed amount using IRR approach and reducing balance method". The ₹400 fee alone moved the cost 2.07 points above the interest rate.
Credit cards and the cost of revolving
A card gives an interest free period, from the date of a transaction to the payment due date, but only if the entire outstanding is paid by that date. Pay part of it and the free period goes. RBI's directions for card issuers (Credit Cards and Debit Cards: Issuance and Conduct, commercial banks, RBI/DOR/2025-26/155, updated as on 1 Oct 2026) spell the consequence out:
- Interest and the free period. If a cardholder makes a partial payment, the interest free period is lost, and interest may be levied from the date of the transaction on the outstanding amount, adjusted for payments and refunds, and not on the total bill. The terms must explain that the free period is suspended if any balance of the previous month's bill is outstanding (paragraph 23).
- The minimum due. It must be set so that there is no negative amortisation. RBI's example is an outstanding of ₹10,000 at 2% a month: interest is ₹200, taxes and charges about ₹50, so the minimum due must be at least ₹250. Issuers cannot charge interest on taxes and charges.
- A warning on every bill. Statements must say that paying only the minimum amount every month stretches the repayment over months or years with compounded interest on the balance.
- Late payment. An account is reported as past due, and late charges levied, only after more than three days past due, and only on the outstanding amount after the due date.
- The rate. Issuers quote the APR for different situations, with the method of calculation and examples. From 1 October 2026 the issuer's approved policy must set an interest rate ceiling in line with other unsecured loans, including processing and other charges (paragraph 22, as substituted).
₹100 in Dynamic Asset Allocator became about ₹388 in the model
Read one more paragraph, 74 words
A worked case. A balance of ₹50,000 carried at 3% a month, which is 36% a year nominal and 42.6% compounded. The borrower pays ₹2,500 a month, 5% of the starting balance, and spends nothing more. The balance clears in 31 months. The total paid is ₹77,497, so the interest is ₹27,497, which is 55% of the amount borrowed. Had the ₹50,000 been paid by the due date, the interest would have been nil.
Credit information companies and your score
A credit information company, licensed by RBI under the Credit Information Companies (Regulation) Act, 2005, collects data about borrowers from lenders and turns it into a credit information report and a score. RBI's Credit Information Companies Directions, 2025 (RBI/DOR/2025-26/378, 28 Nov 2025, updated as on 1 Jul 2026) list four such companies registered with RBI. Their names are in the definitions of that document.
What a report holds
Lenders report in a Uniform Credit Reporting Format. For a consumer account the fields include the date opened, the date of the last payment, the sanctioned amount, the current balance, the amount overdue, the days past due, the credit limit, the rate of interest, the tenure, the EMI amount, and any written off or settled amount. Lenders must also report lending through digital apps to the credit information companies, whatever its nature or tenor (Credit Facilities Directions, Chapter III, paragraph 17). A very small app loan therefore appears in the same report as a home loan.
Two terms to hold on to from 20.3
How a score is formed, in broad terms
RBI fixes the scale and not the formula. Paragraph 21(7) of the Credit Information Companies Directions requires every company to calibrate scores from 300 to 900, for a common classification. Each model is its own and not published. What can be said without guessing is what it has to work with, the report above, in five broad groups:
- Repayment record. Days past due and amount overdue, month by month.
- Amount owed against limits. Current balance against credit limit on cards, and against the sanctioned amount on loans.
- Age of accounts. The opening date of each account.
- Mix. The types of account held: secured, unsecured, card, personal.
- Recent enquiries and new accounts. How much new credit has been sought lately.
Read one more paragraph, 55 words
The weights are not public, so I state none. The arithmetic on one input is plain: on a card with a ₹2,00,000 limit, a ₹1,40,000 balance on the statement date is 70% of the limit in use, and paying it down to ₹40,000 first leaves 20%. How a model weighs that is the company's own.
Your rights over the report
- A free full report. Each credit information company must give an individual one free full credit report, including the score, once in a calendar year (January to December), electronically, after authentication, and must show the link on its homepage (paragraph 21(7)). With four companies, that is up to four free reports a year. The content must match the most detailed version given to lenders.
- How fresh it is. From 1 July 2026, a bank reports as on the 9th, 16th, 23rd and last day of each month, within four calendar days, with the full file by the 5th of the next month (Commercial Banks, Credit Information Reporting Directions, 2025, paragraph 10). Under the Master Direction of 6 Jan 2025, since repealed, it was the 15th and month end, within seven days. Lenders must not leave any repayment, including the last instalment, unreported.
- Correcting an error. The lender that supplied the data has to correct it at the source. A complaint is to be resolved in 30 calendar days, of which the lender has 21. Past that, the complainant is entitled to ₹100 for each calendar day of delay, credited within five working days of resolution. A rejection must come with reasons, and the next step is the RBI Ombudsman under the Reserve Bank Integrated Ombudsman Scheme, 2021 (Credit Information Companies Directions, paragraph 41).
- Declined applications. Information on loans previously declined is not to be reported by a credit information company, because a rejection at one lender could be used as a ground for rejection at another (paragraph 21(5)).
Where this section sits in module 20.3
Prepay or invest: the after tax comparison
The question looks like a rate comparison. It is a comparison of a certain return with an uncertain one, taken after tax. Start with the certain one.
| Option for the ₹5,00,000 | Value after tax at year 10 | Against ₹12.26 lakh |
|---|---|---|
| Prepay the loan | ₹12,25,679 of debt avoided | Reference |
| Debt fund at 7%, 10.4% slab | ₹9,33,284 | Lower |
| Debt fund at 7%, 31.2% slab | ₹8,32,700 | Lower |
| Equity at 8% a year | ₹10,20,382 | Lower |
| Equity at 10% a year | ₹12,09,528 | Slightly lower |
| Equity at 12% a year | ₹14,32,294 | Higher |
Illustration. A debt fund gain is taxed at the slab (section 76, Income-tax Act, 2025). An equity gain is taxed at 12.5% plus 4% cess (13%) on the long term gain above ₹1.25 lakh (section 198). The returns are assumptions and not forecasts.
- The interest deduction. In the old regime, interest on a self occupied house is deductible up to ₹2,00,000 a year (section 22(2)(a) of the Income-tax Act, 2025, with its conditions). The default regime allows none (section 202(2)(a)(v)). In year one the ₹30 lakh loan pays ₹2,65,976 of interest, so about ₹66,000 of it is above the cap and gets no relief. Interest within the cap costs the borrower less than its face rate in the old regime, at most ₹62,400 of tax relief at the 31.2% slab, so the saving from prepaying depends on which side of the cap the interest sits.
- Prepayment charges. A bank cannot levy them on a floating rate loan to an individual for a non business purpose, whether sanctioned before 31 December 2025 or from 1 January 2026, whatever the source of funds and with no lock-in (Responsible Business Conduct Directions, paragraphs 352 and 353). For other loans the bank's policy applies. I read the commercial bank directions only.
- Liquidity. A prepayment cannot be taken back. A fund can. Module 20.1's emergency fund comes first.
Read 4 more paragraphs, 231 words
An illustration. A borrower owes ₹30,00,000 at 9% with 15 years left, so the EMI is ₹30,428 and the remaining interest is ₹24,77,040. A lump sum of ₹5,00,000 is available. If it is paid against the loan with the EMI left unchanged, the loan finishes in 129 months instead of 180, 51 months early, and the interest falls by ₹10,77,196. Ten years on, the outstanding balance is ₹2,40,141 against ₹14,65,819 if nothing was prepaid, a difference of ₹12,25,679. The ₹5,00,000 has become ₹12.26 lakh of debt avoided. That is a return of 9.38% a year, which is 9% nominal compounding monthly, with no market risk and no tax on it.
Now the alternative: put the ₹5,00,000 in an investment for the same ten years. After tax, these are the values at the end of year 10:
The break even is the figure that carries over. To match the certain ₹12.26 lakh, equity would need about 10.16% a year before tax for ten years. A debt fund would need 10.1% in the 10.4% slab, 11.0% in the 20.8% slab and 12.0% in the 31.2% slab. Equity can exceed the break even and can fall short of it. The prepayment cannot fall short. Which side suits a borrower depends on how much of the 10.16% they will leave to chance, and on what else the cash is for.
Four details change the arithmetic:
Loans against securities
A bank can lend against shares, mutual fund units and bonds held as collateral. Chapter XIII, part Q, of RBI's Credit Facilities Directions for commercial banks (RBI/DOR/2025-26/154, 28 Nov 2025, updated as on 1 Oct 2026) sets ceilings for loans to individuals, as updated to 1 Oct 2026; parts of the chapter changed from 1 July 2026 by an amendment dated 30 March 2026. The loan to value ratio is the loan divided by the value of the pledged securities.
| Collateral | Ceiling on loan to value |
|---|---|
| Listed shares and listed convertible debt | 60% |
| Mutual funds other than debt, ETFs, REITs and InvITs | 75% |
| Debt mutual funds | 85% |
| Listed debt securities rated AAA; rated AA to BBB | 85%; 75% |
Read 2 more paragraphs, 190 words
Other rules in the same chapter: a bank must fix a breach of the ratio at once and in no case later than seven working days from the day it occurs. Listed shares and units are valued at the lower of the average daily closing price or NAV of the last six months and the previous day's close. Loans to an individual against securities, other than government securities, listed debt securities and debt fund units, are capped at ₹1 crore across the banking system, of which up to ₹25 lakh may fund the purchase of securities in the secondary market. Loans for an IPO, FPO or ESOP are capped at ₹25 lakh, with a minimum 25% cash margin.
The worked case shows why the ratio matters. Shares worth ₹10,00,000 support a loan of ₹6,00,000 at the 60% ceiling. After a 25% fall to ₹7,50,000 the ratio is 80%. To restore 60%, the borrower repays ₹1,50,000 or pledges securities worth another ₹2,50,000, inside seven working days and in a worse market. If neither happens, the lender can invoke the pledge, and a forced sale can bring a capital gains tax bill.
Gold loans
Chapter IV of the same Directions covers lending against gold and silver jewellery, ornaments and coins. The rules are specific:
- What is allowed. Loans against gold or silver jewellery, ornaments and coins. Not allowed: loans against primary gold or silver, or against financial assets backed by them, such as gold ETFs and gold mutual fund units, and loans to purchase gold in any form (paragraph 36).
- Weight limits. Per borrower in aggregate: 1 kg of gold ornaments, 50 g of gold coins (paragraph 40).
- Valuation. At actual purity, at the lower of the 30 day average closing price and the previous day's close, as published by a bullion association or a SEBI regulated commodity exchange. Only the metal counts, not stones (paragraphs 41 and 43).
- Loan to value. 85% for a total consumption loan up to ₹2.5 lakh, 80% for above ₹2.5 lakh up to ₹5 lakh, 75% above ₹5 lakh, and it has to be maintained throughout the tenor (paragraphs 44 and 45).
- Bullet loans. A consumption loan repaid in one payment at the end is capped at 12 months and can be renewed only on the conditions in paragraph 35, including payment of accrued interest. The loan to value for such a loan counts the whole amount repayable at maturity (paragraph 44, explanation).
Read one more paragraph, 116 words
A worked bullet loan. Ornaments valued at ₹2,40,000 under the rule above. At 85%, the most that can be repayable at maturity is ₹2,04,000. If the interest is 11% a year for 12 months, simple and paid at the end (an assumption), the principal the borrower can take is ₹2,04,000 / 1.11 = ₹1,83,784, which is 76.6% of the value, not 85%. The headline ratio applies to what must be repaid, not to what is handed over. A plain loan of ₹2,50,000 at the 85% ceiling needs collateral worth ₹2,94,118. And a 15% fall in the gold price on the ₹2,04,000 case would push the ratio to 100%, because the ratio must hold throughout the loan.
Digital lending: warning signs
RBI's rules for digital lending sit in Chapter III of the Credit Facilities Directions (paragraphs 6 to 20), which RBI titles Digital Lending Guidelines. A digital lending app can belong to a regulated lender or to a service provider acting for one. The rules turn the usual fraud patterns into checks:
| What you see | What RBI's rule says |
|---|---|
| Money to be sent to a person, or to the app's own account | Disbursal is into the borrower's bank account, repayment goes directly to the lender's account, and no third party or pass through account may control the flow of funds (paragraph 10). |
| A fee the app collects from you on top | Fees of a service provider are paid by the lender, not charged to or collected from borrowers separately (paragraph 10(4)). |
| Demand to access contacts, photos, files or call logs | Apps must not access the phone's files and media, contact list, call logs or telephony. A one time access to camera, microphone or location is allowed only for onboarding or KYC, with explicit consent (paragraph 13). |
| No Key Fact Statement, no APR, no exit window | A Key Fact Statement is required, and a cooling off period of at least one day lets the borrower exit by paying the principal and proportionate APR, with a reasonable one time processing fee possible (paragraphs 9 and 11). |
| A credit limit that grows by itself | No automatic increase in credit limit without the borrower's explicit request (paragraph 8(2)). |
| No named lender or grievance officer | The lender's website must list its digital lending products and apps, and nodal grievance officers must be shown on the websites, in the app and in the Key Fact Statement (paragraphs 9(4) and 12). |
| An agent you were never told about | When a recovery agent is assigned or changed, the borrower must be told the agent's particulars by email or SMS before contact (paragraph 9(6)). |
Read 2 more paragraphs, 143 words
Two pieces of context. Banks report the apps they use, their own and their service providers', on RBI's CIMS portal, and RBI publishes the data without verifying it. The directions say that inclusion is not registration, authorisation or endorsement by RBI (paragraph 18), so a name on the list does not vouch for the app. And an advance fee demanded before a loan is approved is not an RBI rule but a common fraud pattern.
If a complaint to the lender is rejected, partly or fully, or goes unanswered for 30 days, the borrower can complain on RBI's Complaint Management System (cms.rbi.org.in) under the Integrated Ombudsman Scheme, 2021 (paragraph 12(4)). Financial cyber fraud is to be reported at once on the National Cyber Crime Helpline 1930 or on cybercrime.gov.in, as the Ministry of Home Affairs says in its release of 7 Aug 2026.
Where this goes wrong
- Asking only whether the EMI fits. The EMI of ₹44,986 fits a sheet in any month. The total of ₹1.08 crore does not appear in the sheet at all.
- Comparing a flat rate with a reducing rate. 10% flat is 17.9% a year reducing on a 3 year loan.
- Paying only the minimum due. ₹50,000 at 3% a month with a ₹2,500 payment costs ₹27,497 over 31 months.
- Prepaying out of the emergency fund. The 9.38% is real, and so is the job loss that arrives a month later.
- Pledging shares at the top. The ratio looks safe there. After a 25% fall it was 80% against a 60% ceiling.
Where this connects
Module 20.1 gives the sheet that an EMI is read against. Module 20.2 keeps a medical bill from turning into a card balance. Module 4.6, Asset allocation for your goals and risk profile, covers what to do with the rest of the money once the loans are priced. The real return calculator on Learn tools is a way to compare an after tax return with inflation.
Key takeaways
- An EMI is fixed but its split is not. On ₹50 lakh at 9% over 20 years the EMI is ₹44,986, 83% of the first instalment is interest and total interest is ₹57.97 lakh.
- A 10% flat rate over 3 years costs 17.92% a year on a reducing balance. RBI's Key Fact Statement shows the APR with fees: 17.07% on its ₹20,000 illustration at a stated 15%.
- RBI's card rules require a minimum due with no negative amortisation, a warning on every bill, and loss of the interest free period on partial payment. ₹50,000 at 3% a month with ₹2,500 paid takes 31 months and costs ₹27,497.
- RBI fixes the score scale at 300 to 900 and not the formula. Each credit information company owes one free full report a year. From 1 Jul 2026 banks report four times a month. A late correction pays ₹100 a day.
- Prepaying ₹5 lakh on a 9% loan is a certain 9.38% a year. Equity needs about 10.16% before tax for ten years to match it after tax.
- Bank loans against securities are capped at 60%, 75% or 85% of value by collateral, with seven working days to cure a breach. Gold loans carry 85%, 80% and 75% by loan size.
Questions readers ask
Is a flat rate loan cheaper than a reducing balance loan at the same percentage?
No. A flat rate charges interest on the original amount for the whole term. At 10% flat over 3 years the effective annual rate is 17.92%, against 10% on a reducing balance. Compare loans on the APR in the Key Fact Statement.
Can a bank charge a fee for prepaying a home loan?
For a floating rate loan to an individual for a purpose other than business, RBI's Responsible Business Conduct Directions say a bank cannot charge prepayment charges, whatever the source of funds. For other loans the bank's policy applies. Check the loan agreement.
Rules and figures in this module were last verified on 31 Oct 2026. Tax and regulatory rules change; check the source before acting.
