Praise be to Allah.Praise be to Allah.
The penalty clause mentioned in this contract requires repayment of the loan plus any interest accrued. Such a condition renders the entire contract invalid and haraam.
Any loan that includes a condition stipulating that something additional to the amount loaned be paid under any circumstances is a riba-based (usurious) loan, and it is not permissible to go ahead with it or enter into it.
Ibn ‘Abd al-Barr (may Allah have mercy on him) said:
Any additional amount of the same item or substance, or benefits stipulated by the lender to the borrower, constitutes riba (usury), and there is no difference of scholarly opinion on that.
End quote from al-Istidhkaar, 6/516
In a statement issued by the Islamic Fiqh Council of the Muslim World League, it says: If the lender stipulates or requires the borrower to pay a certain amount of money as a specific penalty and at a particular rate in the event of payments being made after the time agreed upon, then this is an invalid condition which should not be fulfilled. In fact it is not permissible, whether the one who stipulates this condition is the bank or otherwise, because this is the exact type of riba that was known during the Jaahiliyyah, concerning which Qur’an was revealed prohibiting it.
End quote from Qaraaraat al-Majma‘ al-Fiqhi, p. 266
It is not permissible to enter into any contract that stipulates a usurious condition, even if the borrower is determined to adhere to the conditions mentioned and not pay any interest.
And Allah knows best.