Are you considering taking out a personal loan? It’s essential to be mindful of potential hidden charges rather than solely focusing on the interest rate.
Here’s what you need to know to help you understand the various fees associated with personal loans. Interest rates are a key factor when choosing a lender.
Your credit score and financial profile can significantly impact the interest rate offered to you. A higher credit score often leads to a lower interest rate.
Processing Fee: Lenders typically charge a processing fee to cover administrative costs. This fee can amount to up to one percent of the loan amount and is non-refundable if your application is rejected.
Tax: In addition to processing fees, lenders may impose a Goods and Services Tax (GST) on these fees. Sometimes, this tax is not disclosed in the initial loan terms.
Cancellation Fee: Most lenders offer a short “free look” period during which you can cancel the loan without penalty, usually within 24 to 48 hours.
However, you may have to pay the remaining loan balance and a cancellation fee if you cancel after this period.
Prepayment Penalties: While many lenders allow early loan repayment, they may charge a prepayment penalty, depending on when you prepay your loan.
Hidden charges to watch out for:
Late Payment Fee: Lenders often impose a late fee if you miss an EMI (Equated Monthly Installment) payment. This fee is usually a percentage of the overdue amount.
EMI Default Fee: If your payment fails due to insufficient funds in your linked account, the lender may charge an EMI default fee.
Penal Interest: Lenders may charge additional interest on unpaid EMIs, which can accumulate rapidly. It’s crucial to be aware of this charge.
Balance Transfer Fee: If you transfer your loan to another lender for better terms, your current lender may charge a fee for the balance transfer, as they would miss out on potential interest income.
ECS Swapping Fee: Changing the account from which your EMIs are deducted for Electronic Clearing Service (ECS) payments can incur an ECS swapping fee.
Duplicate Documentation Charges: Lenders may charge a fee for requesting copies of documents such as an amortization schedule or no-dues certificate at the time of balance transfer.
How to spot hidden charges before taking a personal loan:
Research: Familiarize yourself with the standard fees associated with personal loans. Directly inquire with your lender about any charges you may not have anticipated, especially details regarding penalties for late or early payments.
Read the fine print carefully: Loan agreements often contain crucial information about various charges. Take the time to carefully read the entire document, paying attention to the effective interest rate, EMI due dates, and any prepayment or cancellation fees.
Choose a reputable lender: While it may be tempting to go with the lender offering the lowest rates, ensure they have a strong reputation—research reviews to avoid falling prey to hidden charges from lesser-known lenders.
Use online tools: Many financial websites offer loan comparison tools to help you understand the total cost of various personal loan offers. These tools often provide detailed breakdowns of fees, interest rates, and other charges.
Consult Financial Advisors: If you’re uncertain about personal loan terms or fees, consider consulting a financial advisor.