The Reserve Bank of India (RBI) has cautioned banks and non-banking financial companies (NBFCs) against disbursing personal loans in the backdrop of the steep rise in personal loan disbursals.
RBI Governor Shaktikanta Das told lenders at the monetary policy committee (MPC) meeting on October 6, 2023 to maintain strict due diligence while disbursing personal loans. With this development, getting personal loans will become a bit difficult for borrowers.
But, if you are seeking a personal loan as a borrower to fund some of your expenses, here are three things you should watch out for, besides the rate of interest, and your credit rating, of course.
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Lenders typically charge a processing fee on the loan, which varies with each lender. ICICI Bank for instance levies a fee of 3 per cent and applicable taxes, while Axis Bank charges anything from 0.5-2.5 per cent. Kotak Mahindra Bank charges around 3 per cent and additional Goods and Services Tax (GST). State Bank of India (SBI) charges a processing fee of 1 per cent of the loan amount, but minimum of Rs 1,000 and Goods and Services Tax (GST) and maximum of Rs 10,000 and GST. HDFC Bank charges a processing fee up to Rs 4,999 plus taxes.
Besides, the processing charges, bank could also levy other charges, such as stamp duty charges, equated monthly instalment (EMI) dishonour charges (should you miss your EMI on the due date), collection charges (if the bank has to pay you a visit to collect the EMI due after you have missed paying it despite a couple of reminders, and so on. Stamp duty charges are typically levied at the applicable rate, while the other charges are typically in the range of Rs 200-500 along with applicable taxes.
Some banks charge penalty for missing out on EMIs as an interest on the overdue instalment. For instance, Axis Bank charges a penal interest of 24 per cent per annum, i.e. 2 per cent per month on the overdue instalment.
SBI, for instance doesn’t charge any penal interest for loans up to Rs 25,000. But on amounts exceeding that, if the irregularity exceeds for a more than a month, the bank would charge a penal interest of 2 per cent per annum over and above the applicable rate of interest on the overdue amount for the period of the default.
There is also a loan cancellation charge should you decide to cancel your loan. This is typically charged after you have paid the first EMI and then decide that you do not want to carry on with the loan. ICICI Bank, for instance, charges a flat fee of Rs 3,000 plus taxes as loan cancellation charge.
Also Read: Reserve Bank Of India Issues Fresh Norms For Personal Loans
Lastly, there would be the foreclosure charge should you decide to prepay your loan. This could be anywhere between 2-5 per cent along with GST on the outstanding principal.
So, as a rule of thumb, compare all these charges beforehand prior to applying for a loan.
Lenders could entice you with offers of future top-up loans at lower rates of interest or some other similar offer. But beware of such offers. If you don’t need that top-up loan, don’t fall for it. At times, the loans could also be based on the floating rate of interest, which might initially seem lower than a fixed rate of interest, but a rise in interest rate will eventually make these loans costlier than loans on fixed rate of interest.
So, read through the fine print before taking the loan.
It’s easy to take a loan, but you should remember that you will have to ultimately repay it. If you end up taking a large loan and default on repaying it because of some issue, not only will it adversely affect your credit rating, but could even drag you into a legal labyrinth. In that case, you might have to pay fines, penalties and even risk prosecution by law on account of loan default.
So, here are the three things you should know before applying for a personal loan.
