Loan penalty on principal amount wrong and illegal – BoG

Loan penalty on principal amount wrong and illegal - BoG

Do you know that it’s illegal for banks to charge penalties on loan principal due to default?

The Bank of Ghana as part of its effort to educate the banking population, enlighten them on their rights and bridge their knowledge gap when it comes to loans, repayment, and default penalties.  The central bank organized a banking literacy program for officers of the Ghana Immigration Service in Accra to help broaden the financial literacy of officers.

During the Financial Literacy training, the Bank of Ghana through its facilitators explained that persons who access credit facilities from banks need to be educated on their rights as customers to ensure they are not ripped off with penalties for defaulting.

According to the Bank of Ghana, some financial institutions charge their customers a penalty on the loan principal if the customer defaults for a given month. According to the bank, customers are supposed to pay a penalty on only the principal due which has been hit by the default, and not the entire loan principal.

Let us understand what the Bank of Ghana is saying using a scenario.

Ama Ghana went to take a loan of GHS15,000 for 12  months at an annual interest of 25%

The annual interest to be paid is GHS3750

Monthly repayment for each of the 12 months is

Monthly Principal repayment GHS 1250.00

Monthly Interest GHS 312.50

Total monthly repayment; GHS 1,562.5

The default penalty is 1.5%

Now if a customer defaults with repayment for a given month, according to the Bank of Ghana penalty for defaulting must be charged on the Monthly Principal repayment of GHS 1250.00 due and not the entire GHS15,000 loan secured.

Now that this is clear if you have a load running, do well to check the agreement document to ascertain if the default penalty is on the Principal due or the total loan principal. Again, if you seek a loan in the future, ask for clarification from the bank or lender if the default penalty will be calculated on principal or the amount due at a particular time.

 

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