A personal loan is one of the oldest unsecured loans available to borrowers. They are easy to avail of, and if they are pre-approved, it becomes a lot easier for the borrower to avail of them as well. The reason why personal loans are so popular with borrowers is because of the fact that the borrower can use it for any purpose, unlike loans which are collateral-based and have to be used for the specific purpose for which they are borrowed.
Personal loans are particularly useful when there is a sudden requirement of money or some planned requirement, but only for the short term, and when you don’t want to get into the hassles of putting collateral, but want money faster with less paperwork.
However, easy processing does not mean that the charges on these loans are any less. In any unsecured loan, the rate of interest is high because of the high-risk factor.
The rate of interest should be the first thing that a borrower should consider before taking a loan. The rate can vary from bank to bank and is based on the customer’s profile and credit score. You need to check it with different banks to find out the best offer.
So, while you compare the rates on different loans, here are a few other things to keep in mind while applying for a personal loan.
Processing Fee: The bank levies charges for the administration and processing of the loan, and these are called as processing charges. Every lender can charge a different processing fee, it could be a certain amount or a percentage of the loan amount. You can either pay this fee upfront, or it will be deducted from the loan amount at the time of disbursal.
Penal Interest On Overdue Payment: For the repayment, the bank fixes the tenure, which is usually decided at the time of the loan processing. Accordingly, the bank fixes the equated monthly instalment (EMI) that is due on the loan each month throughout the loan tenure. Any delay in repayment of these EMIs would lead to penal interest on the overdue instalment. Axis Bank charges 2 per cent per month or 24 per cent per annum, according to its website. As such, one must carefully choose an EMI that is easy on the pocket, otherwise one might end up paying penalty on the loan default.
Verification Charges: To ascertain the borrower’s repayment capacity, lenders need to check their credit score, for which there are other agencies. Lenders have to pay for this, and they pass it on to the borrowers as verification charges.
Pre-Payment And Foreclosure Charges: In case you want to prepay your loan in part or in full, banks impose charges on that as well. If you repay your loan before your loan completion tenure, the lender will lose interest income, and that’s why they charge you for making prepayment or part payment. For instance, IDFC First Bank charges 5 per cent of the principal loan outstanding after a minimum of six EMI payments.
Duplicate Statement And Amortisation Schedule Charges: If you want a duplicate statement of your loan account statement to check your payment schedule or amortisation schedule, you need to request it from the bank for which the bank will usually charge you a fee.
Swap Charges: On requesting any changes in your repayment instruction, such as repayment mode, repayment instruction, or EMI date, the bank would levy what is called as ‘Swap’ charges. For instance, Kotak Mahindra Bank charges Rs 500 plus applicable tax for any such changes.
Stamp Duty: There is a stamp duty for rendering legality to any document. Banks charge the stamp duty for personal loans in accordance with the State Stamp Act.
Good And Service Tax: Banks will charge you GST on all services, including repayment, partial payment, verification, loan closure, statement issuance charges, etc.
Besides these, there could be other charges as well which you should check with your lender. For instance, the bank might charge you for issuance of no dues certificate, cheque/EMI bounce charges, etc. Some banks have a limit on the number of prepayments, too.
So, before taking a loan, be aware of the charges and clarify about the same from your lender.