Money Paid For Principal, Bank Counted As Advance EMIs—How To Correct And Cut Interest

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New Delhi: An individual had an education loan of Rs 8 lakh from Bank of Baroda. In March, a lump sum payment of Rs 4 lakh was made, with the clear intention that it would reduce the outstanding principal and consequently the interest charged. Instead, the bank processed this as payment for advance EMIs—crediting future monthly instalments—without prior notice or giving the borrower a choice.

Cases like this are not isolated to Bank of Baroda; other banks may also do this if a large payment is made close to an EMI date or if the borrower does not specify the purpose. Ideally, the bank should inform the customer or provide a choice before processing in this manner.

According to rules governing education loans in India, borrowers are allowed to make prepayments without facing any penalty. This provision is also highlighted in the 2022 Model Educational Loan Scheme from the Indian Banking Association, which states that partial or full prepayments toward principal are allowed without extra charges.

This implies that the Rs 4 lakh amount should have gone toward reducing the principal balance, not as advance EMIs. Here’s the recommended process for resolving the issue:

Go to the home branch handling the education loan.

Draft a formal written request addressed to the Branch Manager, stating the loan account number, specific payment details, and attach evidence of the ₹4 lakh transaction.

Clearly clarify that the intention of the payment was for principal prepayment, not for advance instalments.

Ask for a reversal of the misapplied payment and that the entire sum be credited toward the outstanding principal. Request a stamped copy of the letter for your records.

Ask for an updated loan statement showing the corrected principal balance and a revised repayment schedule, reflecting the changed EMI or shortened loan tenure.

If the branch does not resolve the issue within 7–10 working days, submit a detailed complaint through the Bank of Baroda Grievance Portal, including all supporting documentation.

If the matter remains unresolved even after 30 days, escalate by filing a complaint with the Reserve Bank of India’s Banking Ombudsman, ensuring that all relevant documents and correspondence are ready for review.

Some key points to highlight:

Education loan policies in India allow prepayments toward the principal amount at any stage, with no penalty.

Banks should not treat substantial payments as advance EMIs without the borrower’s explicit consent.

Borrowers have a clear right to request that such payments be adjusted towards the principal.

Best practices include always giving written instructions with large payments, specifying that they are for principal prepayment, and keeping copies of all transactions and communications. Often, a formal written request at the branch resolves the problem, but don’t hesitate to follow official escalation processes to ensure your rights are protected.