Personal loans: What are the hidden costs that you should be aware of?
While personal loans serve many purposes, they carry hidden costs such as processing fees, foreclosure charges, late payment penalties, and insurance fees. Understanding these additional expenses is vital for borrowers to make informed decisions.
A personal loan can be a panacea for a number of needs which include construction of a house, wedding at home, during an emergency, for an urgent trip, or even for higher education. However, when you take out a loan from a bank, it may impose a ‘cost’ which you were not earlier aware of. These are known as hidden charges.
It is imperative for the loan applicants to be aware of them and make a decision of whether to borrow a loan or not after factoring into this. Here’s a breakdown of the hidden charges associated with personal loans in India that every borrower should be aware of
Personal loan: Hidden charges
1.Processing fees: Banks levy a processing fee for processing your application which could range from 1 to 3 per cent of the loan amount. For example, when you raise a ₹5 lakh loan, a 2 per cent processing fee would cost ₹10,000. This is deducted upfront, reducing the actual loan amount you receive.
2.Foreclosure charges: Several borrowers aim to repay their loans early to reduce interest costs. However, banks and NBFCs often impose prepayment or foreclosure penalties, typically 2 to 5 per cent of the outstanding amount.
3.Late payment Fees: Missing an EMI can result in late payment penalties, usually ₹500 to ₹1,500 per instance or a percentage (2-3 per cent) of the overdue amount.
4.GST: Most loan-related charges attract Goods and Services Tax (GST) at 18 per cent. This is applicable on processing fees and prepayment charges.
5. Insurance fees: Lenders tend to offer loan protection insurance to cover EMI payments in case of job loss, disability, or death. The premium can be ₹5,000 - ₹15,000 or more, either paid upfront or added to the loan amount, raising the interest burden.
7. Conversion charges: Some banks may permit borrowers to change their loan tenure or switch from a fixed to floating interest rate (or vice versa) for a small fee. Notably, RBI recently instructed banks to give borrowers an option to switch from floating rate to fixed rate when the rates are reset.
8. Minimum balance: If your bank account has insufficient funds for EMI auto-debit, you may be charged ₹300 to ₹750 per bounce. Multiple bounces can also lower your credit score.
(Note: Raising a loan comes with its own risks. So, due caution is advised)
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