When it comes to personal loans, there are hundreds of players in the market. So, how do you decide which one is best for you?
First, there are a few basic offerings that should be compared:
- Interest rates
- EMI structure
- Repayment tenure
But even these numbers do not give the complete picture. Sometimes, a company would offer lower interest rates, but make up for it through hidden charges you were unaware of. It is these hidden charges that hike up your due amount in the long run.
So, before we tell you how to avoid these hidden charges, let’s look at the different types of hidden charges that can be levied:
- Late Payment Fees: As a way to discourage late payments, companies levy a ‘late payment’ fee from borrowers. This fee is generally standard and varies from 2% to 3% based on the EMI costs. You can check the ‘late payment’ policy of companies in advance to make an informed decision. But remember, the late payment fee also incurs GST charges, which can further hike up the fee.
- Processing Fees: Processing fees are charged during the application process itself. They are meant to cover any costs incurred by the lender during the application, approval, and disbursal process. The amount varies based on the T&C of the loan, the amount borrowed, and the lender. While processing fees are generally not very high, it’s always good to review and compare.
- Foreclosure Fees: Foreclosure fees are a penalty on repaying the loan earlier than stipulated in the terms and conditions of the personal loan. It is usually levied by lenders to discourage early repayment.
Now that you know what charges can be levied on your personal loan, let’s understand how you can avoid them.
1. Talk to your lender:
When you take a personal loan from a bank or a financial institution, it is good to sit with the Relationship Manager (RM) in charge and ask questions. You can get a better understanding of the terms of repayment, interest rates, and what charges can potentially be levied on your personal loan.
2. Assess any charges levied:
Be aware of the charges levied from the get-go and not just when you are in the midst of repaying. Understand not only what charges have been levied, but also why.
3. Read the loan agreement carefully:
Once you have met with the relationship manager and have decided to go ahead with a particular personal loan, the lender will share an agreement with you. Before signing the agreement, it is wise to go through it, including—and especially—the fine print. The length of the agreement may discourage you from reading it, but there are no shortcuts to this. Every single term and condition discussed should be mentioned in the document. Sign the document only once you are sure that the terms and conditions laid out are acceptable to you.
4. Calculate your EMI in advance:
The EMI you pay comprises two components: principal and interest. Generally, the interest is higher in the beginning and the principal lower. Subsequently, as you start paying off your dues, the interest component decreases, and the principal repayment component increases. To know the breakdown of your EMIs, you can use a Personal Loan EMI Calculator.
Now that you know what all to check before taking a personal loan, hopefully, you’ll never be caught off-guard with sudden charges. This is a hygiene check that you must repeat every time you take a loan, and that will help you get the best terms out of your agreement.
A good thumb rule is to opt for a lender who has a transparent loan process in place. This way, you will not end up being charged for something you did not agree to. Knowing the terms, conditions, personal loan interest rate and charges beforehand puts you in a better place to pay off the loan on time without incurring any hidden costs.