Bank treated my Rs 4 lakh prepayment as advance EMIs, can I get it reversed to cut my loan interest?

I had an Rs 8 lakh education loan with Bank of Baroda. In March, I made a ₹4 lakh lump sum payment, clearly intending it as a principal prepayment to reduce interest. However, the bank treated it as advance EMIs without informing me or offering a choice. Has anyone faced this with BoB or another bank? Can I request the bank to reverse this and apply the amount toward principal reduction instead? What’s the best way to approach this—branch visit, written request, or formal escalation? Are there any specific terms, RBI rules, or forms that can help expedite the correction?

Advice by Dev Patel, Quantitative Research Analyst at 1 Finance.

You're right to be concerned. When you make a substantial lump sum payment, the clear intention is usually to reduce the principal. Some banks, by default, might allocate such payments as advance EMIs if explicit instructions aren't provided or if the payment is made very close to an EMI due date. However, this should ideally be communicated or offer you a choice.

Education loans in India explicitly permit prepayments, that too without penalty. The 2022 Model Educational Loan Scheme (by the Indian Banking Association) further reinforces that borrowers can prepay either in part or in full for principal reduction without penalties.

This means the bank should have applied your Rs 4 lakh payment directly to your principal, not as advance EMIs. Start by visiting your Bank of Baroda home branch. Prepare a clear, concise letter for the Branch Manager, including your loan account number and details of the Rs 4 lakh payment, with proof. Explicitly state the payment was for principal prepayment, not advance EMIs. Request the bank to reverse the misapplication and reapply the entire amount to your outstanding principal. Do not forget to get a stamped acknowledgement on a copy of your letter as proof of submission.

Also, request a revised repayment schedule reflecting the reduced principal, offering you either lower EMIs or a shorter loan tenure.

If your branch visit doesn't yield a satisfactory resolution within 7-10 working days, escalate the issue. File a formal complaint online via the Bank of Baroda Grievance Portal detailing your branch visit and attaching all relevant documents.

If the issue is unresolved even after 30 days of your complaint with the bank, your final resort is the Reserve Bank of India, Banking Ombudsman - The Ombudsman scheme resolves customer complaints against banks; be prepared to provide all loan, payment, and correspondence details.