Hidden fees in personal loans: What banks don’t tell you

A personal loan can be a solution for various needs, including the construction of a house, a wedding, an emergency, an urgent trip, or even higher education. However, when you take out a loan from a bank, it may impose a ‘cost’ which you were not previously aware of. These are known as hidden charges.

It is imperative for aspiring loan applicants to be aware of these factors and make a decision on whether to borrow a loan or not after taking them into account. Here’s a breakdown of the hidden charges associated with personal loans in the country that every borrower should be aware of.

Hidden charges on personal loans

1. Processing fees: Banks levy a processing fee for processing your application, which could range from 1 to 3% of the loan amount. For example, when you raise a ₹5 lakh loan, a 2% 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% 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% ) of the overdue amount.
4. GST charges: Most loan-related charges attract Goods and Services Tax (GST) at 18%. This is applicable to processing fees and prepayment charges.
5. Insurance fees: Lenders often offer loan protection insurance to cover EMI payments in the event of job loss, disability, or death. The premium can range from ₹5,000 to ₹15,000 or more, which can be paid upfront or added to the loan amount, thereby increasing the interest burden.
6. 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, the RBI has recently instructed banks to offer borrowers the option to switch from a floating rate to a fixed rate when the rates are reset.
7. Minimum balance: If your bank account has insufficient funds for EMI auto-debit, you may be charged between ₹300 and ₹750 per bounced payment. Multiple bounces can also lower your credit score.

Now, the above-mentioned hidden charges must be acknowledged and understood by the aspiring borrowers to make more informed borrowing decisions. Not only this, but there are also five C's of personal finance that borrowers should follow diligently to ensure that credit and borrowing can be managed properly.

What are the 5 C's of personal finance?

1. Character: This reflects the borrower's reliability and credit repayment history. It is an indicator of an individual's responsibility in handling past debt.
2. Capacity: Checks the borrower's ability to repay or clear out a pending loan based on current monthly income, debt, and cash flow.
3. Capital: This is a clear representation of the borrower's current financial might. Their own financial assets and investments showcase financial strength.
4. Collateral: This refers to the number of assets pledged to secure a loan. Solid collateral reduces the lender's risk in the event of a default.
5. Conditions: This section details the objective of the loan, the economic environment, and the lender-specific conditions that may influence the approval and pricing of the loan product.

In conclusion, before applying for any particular personal loan product, aspiring borrowers should consult certified investment advisors, understand the associated hidden charges and fees, and proceed only after having complete clarity on the terms and conditions of the loan.

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Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards, and credit scores. Mint does not promote or encourage taking credit, as it comes with risks such as high interest rates and hidden charges. We advise investors to discuss with certified experts before taking any credit.