Compliance
One loan, four rates: which number belongs on the sanction letter, the agreement and the KFS
CS Manoj Famra · 2026-10-09 · 6 min read (estimated)
A borrower reads the sanction letter and sees 14%. They read the Key Facts Statement for the same loan and see 15.43%. They ask which one is true.
Both are. They are answers to different questions, and a lender who cannot say which is which in one sentence has a problem that will surface in a grievance rather than in a meeting.
The four numbers a single loan carries
Take ₹5,00,000 for three years at 14% reducing, with a ₹10,000 processing fee deducted at disbursement.
| Figure | What it answers | |
|---|---|---|
| Contracted rate | 14.00% | the rate the loan accrues interest at, on the outstanding balance |
| Flat equivalent | 7.68% | the same cash flows expressed on the original principal — a quoting convention, nothing more |
| EMI | ₹17,088.81 × 36 | what is actually collected |
| APR | 15.43% | the rate that equates the instalments to what the borrower received — ₹4,90,000, not ₹5,00,000 |
Total repaid: ₹6,15,197.34. Total interest: ₹1,15,197.34.
The APR is higher than the contracted rate because the borrower never had the fee. They repay on ₹5,00,000 and received ₹4,90,000, so the money actually cost more than the coupon says. Nothing has been added; the same payments have been measured against a smaller amount.
And note the direction of the flat figure: 7.68% flat looks cheaper than the 14% contracted rate on the identical loan. That is the quoting convention doing its work, and it is why the two are never interchangeable — flat and reducing in full.
Which document takes which rate, and why
The sanction letter — the contracted rate. It states the terms being sanctioned: amount, tenure, rate, instalment, security. The rate here is the one the loan will accrue at, because that is the term being agreed. A sanction letter carrying an APR instead is stating something the loan does not accrue at.
The loan agreement — the contracted rate, and the basis. The agreement has to be enforceable, so it must say not only the number but what it is applied to: reducing balance or flat, the rest period, and whether it is fixed or floating. A number without a basis is not a term.
The Key Facts Statement — the APR. This is the document that exists to be comparable across lenders, which is why it takes the rate that folds the charges in. Giving a KFS the contracted rate defeats the only purpose it has. What belongs in that computation — and the three charges that get left out.
The repayment schedule — the EMI and its split. Not a rate at all, and the place where the rate becomes money.
The failure getting this right prevents
Two documents in one file quoting different rates in the same role. A sanction letter saying 12% and a schedule built at 14% is not a disclosure question, it is a file that contradicts itself — and it will be read by somebody who did not write it: a borrower, an auditor, an inspecting officer, a court.
The common causes, in order of how often they happen:
- The letter reads a rate from the scheme master rather than from the sanction. The scheme has
since been revised and the letter now prints a rate this loan was never written at. A loan is governed by the terms snapshotted when it was sanctioned — why that matters.
- A contracted-instalment product with no rate stored. Where the lender fixes the instalment
rather than the rate — common in microfinance and in small-ticket lending — the rate is implied by the instalment and has to be derived. A document that prints the scheme's nominal band instead is printing a number that describes no loan.
- The APR computed on the sanctioned amount rather than the disbursed amount. If the fee is
deducted at disbursement, the borrower's cash flow starts at the net figure. Computing on the gross understates the APR, which is the direction that matters.
The test worth running on your own documents
Take one live file. Open the sanction letter, the agreement, the KFS and the schedule side by side, and answer four questions:
- Does the sanction letter's rate equal the rate the schedule was actually built at?
- Does the agreement say what the rate is applied to — reducing or flat, and the rest period?
- Is the KFS's APR computed on what was disbursed, or on what was sanctioned?
- Does the instalment on every one of them match to the rupee?
If a contracted-instalment loan is in the set, run it on that one. It is where this breaks first, because the rate on those files is derived rather than entered, and a document that does not derive it falls back on something that was never the loan's rate.
The figure on a payoff quote
None of the four rates is what a borrower closing early is quoted. That is a cash figure computed as at a date, and it rounds down rather than to nearest because there is no later instalment to absorb the residue.
Where the APR itself comes from
Of the four rates, the annual percentage rate is the only one that is a computation over a cash-flow rather than a term of the contract — which is why it moves when a fee or an advance instalment moves and the contracted rate does not.
Frequently asked questions
Why is the APR on my Key Facts Statement higher than the interest rate?
Because the APR measures the instalments against what the borrower actually received, and charges deducted at disbursement mean that is less than the sanctioned amount. On ₹5,00,000 at 14% with a ₹10,000 fee deducted up front, the APR is 15.43% — the same payments measured against ₹4,90,000.
Which rate goes on the sanction letter?
The contracted rate — the rate the loan accrues at. The APR belongs on the Key Facts Statement, which exists to be comparable across lenders and therefore folds the charges in.
Is it wrong for a sanction letter and a KFS to show different rates?
No, provided each shows the right one. It is wrong when two documents show different numbers in the same role — a sanction letter and a schedule disagreeing about the accrual rate is a contradiction, not a disclosure.
What rate applies when the lender fixes the instalment rather than the rate?
It has to be derived from the principal, the instalment and the tenure, because no rate was entered. Printing the scheme's nominal band on such a file states a rate the loan was never written at.
Should the APR be computed on the sanctioned or the disbursed amount?
On what the borrower received. Where a fee is deducted at disbursement, computing on the gross sanctioned figure understates the APR.
Related: Flat rate and reducing balance · What goes into the APR · What the Key Facts Statement must contain · Why a loan keeps the terms it was sanctioned under · APR calculator
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