How to read a loan Key Facts Statement: APR, EMI and fees
Before you sign a loan, the lender must give you a short sheet that shows the real cost in one place. It is called the Key Facts Statement, or KFS. This guide explains what the Reserve Bank of India requires and shows, with a Rs 10 lakh example, why the interest rate on the poster is not the whole story.
What RBI requires
In its circular of 15 April 2024, RBI says regulated entities must give a KFS to prospective borrowers, in the standard format, in a language they understand, and must explain it and obtain an acknowledgement that the borrower has understood. All new retail and MSME term loans sanctioned on or after 1 October 2024 must follow this. Credit card receivables are exempt.
The circular says the KFS must carry a unique proposal number and be valid for at least three working days for loans with a tenor of seven days or more. During that time the lender is bound by the terms in the KFS if you agree. It must also include a computation sheet for the Annual Percentage Rate (APR) and the amortisation schedule of the loan. RBI defines APR as the annual cost of credit that includes the interest rate and all other charges. Charges collected for third parties, such as insurance or legal fees, also form part of the APR and must be shown separately. Any fee not mentioned in the KFS cannot be charged without your explicit consent. The KFS must also appear as a summary box in the loan agreement.
An example with round numbers
Take a loan of Rs 10,00,000 for 3 years at an assumed 10% a year. These are example figures, not an offer. The EMI is about Rs 32,267. Over 36 months you repay about Rs 11,61,619, so the interest is about Rs 1,61,619.
Now add a processing fee of 1% of the loan, or Rs 10,000, deducted from the amount you receive. You get Rs 9,90,000 in hand but still repay Rs 32,267 a month. The total cost of credit becomes about Rs 1,71,619. If we work out the yearly rate that makes the 36 EMIs equal the Rs 9,90,000 you actually received, we get a monthly rate of about 0.891%, which is roughly 10.7% a year when multiplied by 12. This is only our approximation. The official APR in your KFS follows RBI's own illustrative method in Annex B of the circular, so your lender's figure may differ slightly. The point is that a stated 10% became about 10.7% once the fee was counted. We checked the figures with a calculation.
How to use the KFS
Compare lenders by APR and total cost, not by headline rate alone. Look at every fee: processing, insurance, legal and any others. Read the amortisation schedule to see how much of the early EMIs is interest. Use the validity period to compare offers instead of deciding on the spot, and note whether pre-payment charges apply.
Next step
Put your own loan amount, rate and tenure into the Gunaka EMI calculator and compare the result with the EMI and total interest shown in the KFS. If they do not match, ask the lender to explain the difference in writing. Gunaka gives estimates, not financial advice.
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