Consider These Charges Before Taking A Personal Loan

Starting something new, planning something different, dealing with a sudden situation or planning something big always gets funneled to one question- where will the funds come from? A quick and safe option here is taking a personal loan.

Unlike specific-purpose loans, personal loans offer versatile solutions for various needs without requiring collateral. With just a click, it is possible to access funds for big purchases, debt consolidation, urgent expenses, higher education, vacations, or weddings. While these loans come with interest on the principal, it is also essential to consider additional charges for a comprehensive analysis. When comparing rates, keep the following factors in mind for a smooth personal loan application process and understanding-

Interest Rates:

Personal loan interest rates vary between 10.50% and 25% p.a., with the upper limit potentially higher for non-salaried borrowers. To determine the rate, lenders consider factors like credit score, relationship with the bank, and financial stability. It is advisable to clarify the interest rate and assess monthly installment affordability before finalizing the loan agreement.

Processing Fees:

Processing charges are fees levied by the bank for loan administration and processing. Lenders may charge a fixed amount or a percentage of the loan amount, usually ranging from 0.5% to 2.5%. You can pay this fee upfront or have it deducted from the loan amount during disbursal.

Verification Charges:

Before disbursing the loan, a bank must be confident in the borrower's ability to repay the amount. The bank typically employs an agency (third party) to verify the credentials for verification. These representatives investigate your credit reports and history. The verification charge is the additional expense incurred by the bank for verification. As an applicant, this fee is levied on you as it adds to the bank's expenses.

Penal Interest On Delayed EMI:

When you take a loan, the bank sets the tenure and equated monthly installments (EMI) for repayment. Delayed EMIs incur penal interest. Choose an EMI that fits your budget to avoid loan default penalties. Calculate the EMI in advance, plan your finances, and repay the loan responsibly to ensure timely payments.

Foreclosure Charges:

As a borrower, you can foreclose the loan by repaying the entire amount before the tenure ends. However, this means the lender misses out on interest charges. Hence, you will attract personal loan foreclosure charges, typically ranging from 2% to 4% of the loan amount, though it may vary depending on the lender. Besides these, check for the lock-in period, if any, as this indicates the time before you are not allowed to foreclose a personal loan.

Fees To Generate Statement Copies or Amortization Schedules:

To obtain a duplicate loan account statement for payment or amortization schedule verification, you must request it from the bank, which charges an additional fee. The charges vary between lenders, ranging from ₹200 to ₹500 and sometimes even exceeding ₹500 in rare cases.

Prepayment Charges:

Borrowers often consider prepaying, that is, prepaying a part of the loan amount, to alleviate high-interest costs and EMI burden. While prepayment is advantageous, it may involve charges. RBI prohibits prepayment penalties for personal loans with floating interest rates (subject to market fluctuations). However, such charges may still apply to personal loans with fixed interest rates.

Swap Charges:

The bank imposes 'Swap' charges for any modifications made to your repayment instruction, such as changes in repayment mode, repayment instruction, or EMI date.

GST:

You may incur a small fee for certain additional services during loan sanction or repayment, known as Goods and Services Tax (GST). The current applicable GST on loan-linked services is 18%. These services include processing fees, prepayment and part-payment charges, repayment mode swap charges, cancellation charges, missed repayment charges, duplicate statement issuance charges, etc. However, please note that GST does not apply to loan interest charges.

Loan Cancellation Charges:

After the approval or disbursal of a personal loan, canceling it may attract a loan cancellation charge set by the lender. Some banks charge a flat rate, such as Rs. 3,000, and 18% GST for cancellation. Others apply interest payment between disbursal and cancellation and do not refund the processing fee.

Personal loan charges are vital considerations when budgeting for one. Reading the fine print and understanding all fees, from processing to personal loan pre-closure charges, is essential before committing. Neglecting repayments can lead to debt and harm your credit score. So it is good to be prudent to choose a personal loan and ensure that you borrow from reputed lending institutes like IIFL Finance that offer complete transparency in personal loan charges and fees.