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Treasury & Finance

The Hidden Costs of
Foreign Currency Loans

Author Myforexeye Research
Oct 10, 2025 5 min read
Foreign currency loans are often marketed as cost-saving tools for businesses that deal internationally. With interest rates abroad being much lower than domestic rates, these loans—whether for working capital or as Foreign Currency Term Loans look appealing at first glance.

But like many things in finance, what you see isn't always what you get.

Let’s uncover the hidden costs involved and see how numbers can change the narrative.

Why Foreign Currency Loans Seem Attractive

Imagine you are an Indian company. You compare loan rates, and the math looks simple:

INR Loan Rate

8.50%

Per Year

Compare

EUR Loan Rate

5.25%

Per Year

Apparent Savings

3.25%

On Paper

The Illusion

On a ₹10 Cr loan (2.5 years), you seemingly save ₹81.25 Lakhs.

But wait...

Hidden Cost #1: Currency Risk

Foreign currency loans expose you to exchange rate volatility. Let’s revisit the same ₹10 crore loan. You borrowed when EUR/INR = 98. Now consider 3 scenarios:

  • Below 98: Good news — You repay fewer INR.
  • 98 - 106.16: Mixed — Interest savings offset FX losses.
  • Above 106.16: Bad news — Currency loss wipes out savings.

The "Ouch" Moment

If EURINR rises to 110, the repayment cost becomes:

(₹10 crore ÷ ₹98) × ₹110 = ₹11.22 crore

That’s a loss of ₹1.22 crore—far more than the ₹81.25 lakh interest saved!

Hidden Cost #2: Hedging Expenses

To avoid currency risk, you may hedge using a forward contract. But hedging isn’t free. If the forward premium for EURINR is 3% per year, for a 2.5-year loan, this adds up to:

Hedging Math

₹10 Cr × 3% Premium × 2.5 Years = ₹75 Lakhs Cost

Now your net savings shrink to just ₹6.25 lakhs (₹81.25L Savings - ₹75L Cost). The risk-reward ratio shifts dramatically.

Hidden Cost #3 : Benchmarks Rate Volatility

📈

Benchmark Volatility

Foreign loans are often linked to global benchmark rates like SOFR (USD), EURIBOR (EUR), TONA (JPY).

📝

Problem

If SOFR rises from 1% to 4%, a $1 million USD loan interest jumps from 3% to 6%, an extra $30,000 (or ₹25 lakh approx.) annually.

Hidden Cost #4 : Administrative Charges

Foreign loans bring extra operational costs like:

1
Foreign remittance fees
2
Bank processing charges
3
Loan management overheads

How to Minimize These Costs

1
Use Natural Hedge If you earn in EUR, borrow in EUR. Your inflows pay off your outflows naturally.
2
Monitor Currency Bands Track live rates. If the rate approaches your breakeven (e.g., 106.16), hedge immediately.
3
Run Stress Tests Simulate a 5%, 10%, and 15% depreciation before signing the loan deal.
3
Evaluated Fixed vs Floating Rates Lock Fixed rates if upward rates movement expected.
3
Run a Stress test Simulate FX loss, rate hikes and hedge cost before borrowings.

Frequently Asked Questions

Currency depreciation increases the local currency cost of repayments. For example, if INR depreciates 10% against EUR, a €1 million loan becomes ₹1.1 crore instead of ₹1 crore (assuming EURINR was 100 initially).

Natural hedging means borrowing in the same currency you earn. If you export in USD or EUR, taking a loan in the same currency ensures your inflow matches the outflow—minimizing FX risk.

Floating rates depend on global benchmarks like SOFR or EURIBOR. If these rise, your interest payments also rise, potentially erasing any cost advantage of taking a foreign currency loan.

Hedging costs depend on currency volatility and tenure. For example, a 2.5-year EURINR hedge with a 3% annual premium could cost ₹75 lakhs on a ₹10 crore loan.

If the domestic currency weakens too much, the gain from lower interest is wiped out. In one example, a EURINR rise above 106.16 on a loan taken at 98 makes the loan more expensive than a regular INR loan.