In India, taking personal loans has increasingly become a go to solution for a lot of people. It gives people the ability to quickly and easily obtain money for unforeseen circumstances, and offers a solution for people looking to make major purchases, or for people looking to bring together multiple debts into a single debt and payment. However, loans come with a major expense that is not obvious, being the interest that needs to be paid back. In this article, we help people in understanding what the various costs of taking a loan are, beyond the interest of money that is received.
- *Processing Fees: A Large, Though Frequently Visited Cost*
Of all costs that comes with taking a loan, the processing fee is probably the most common and in some instances is not even considered. A processing fee is charged for processing and reviewing the requested loan, and can be anywhere from 1% to 3% of the requested loan, depending on the moneylender. For some moneylenders, this fee does not look like a lot of money at all, and is even ignored, however for really big loans this fee is actually an enormous amount.
Let’s say you want to take out a loan of ₹5 lakh and the processing fee is 2%. That will end up being ₹10,000 up front for the loan just for the processing fee. Most people who take loans don’t really consider the fee until the loan agreement gets sent to them.
2: Prepayment and Foreclosure Charges: The Price of Paying Your Loan Off Early
Agreements may say that partial or fully early loan payment are set to a new payment date, without any fees. But life has a way of changing, and with the right set of circumstances a loan may be set to be paid off early. While this is a great way to save on the loans interest, it tends to come with a fee of sorts. Prepayment or foreclosure charges are a common fee that gets placed on loans if a person wants to pay it off before the end date of the agreement.
Most of the time, fees tend to similar for all loans. Prepayment and foreclosure fees on a loan are anywhere from 2-5% of the total amount owed, depending on which loan you lend with. This fee has a great impact if you really want to pay off a loan early. It will lessen the overall goal of improving your loans state, and the interest being paid on the loan will still be really high.
When considering paying your loan off early, you should look into how different lenders approach this. Some may have a more flexible approach, while others may have very strict guidelines and actually penalize you for paying your loan off early.
3. Late Payments: The Hidden Cost of Waiting
Loans are meant to be paid back, and the lenders expect them to be paid back on time. The majority of lenders will charge a late fee, and this fee could be anywhere between ₹500 and ₹2000, and this is just for one payment that’s made late! It’s very common for the lenders to raise the interest on the loan when they notice that their borrower is consistently making late payments.
But on top of losing money in interest and late fees, it’s going to severely damage your credit score. Like it or not, your credit score is going to be analyzed for every loan you try to take out in the future. It could also result in a much higher interest rate.
To skip all these penalties, paying on time is a must. Reminders or automatic payments can help keep you on track with your payments.
Insurance. Personal loans from Indian lenders can come with loan protection insurance. This insurance put be handy, but it can increase your loan cost significantly.
Insurance of this sort protects you from things like sudden illness or job loss. This insurance is often not needed, but lenders usually charge it. So, if you are getting a loan of ₹5 lakh, the insurance price could be ₹10,000 or more, based on what you get.
Before you say yes to this insurance, consider determining if you really need it and if yes, you can find it at a better price with a separate insurance company.
5. Interest Rates: Are All The Same?
Interest rates are a visible cost tied to a personal loan, but surprise expenses can affect the overall cost. There are many low-cost loans, but borrowers neglect how loans terms, processing fees, and other charges can cause the cost to inflate.
In India, personal loans have interest rates range to about 10 percent to 24 percent depending on credit score, lender, and loan duration. Some people don’t know that lower interest rates can come with higher processing fees that act as a hidden cost and a need for a guarantor.
A lower interest score can qualify you for lower rates, but it is essential to examine other loans and the expenses to pay. Comparing the annual percentage rates can make a difference while shopping to help understand the expense.
6. Processing Fees and Other Hidden Costs.
As we know now, we have GST on almost everything. As we make more loans, lenders are more and more likely to charge GST on processing fees. It is becoming a standard practice to charge these fees. GST on loans is charged at 18 percent and that is a large charge we overlook. It is not as negligible as one may think. It increases the cost of the loan significantly.
So, for example, suppose for a processing fee of 10 thousand rupees, they charge GST of about 1,800 more. While this fee is small in comparison to the loan amount at hand, we have to be realistic and frame this charge when considering the amount of money we are in for in the first place.
7. Additional Charges: ATM Transactions, Cheques, and Other Services.
For some personal loans, costs on the surface may not look bad, but there are some lenders that charge delinquent ATM fees on top of the loan maintenance. Fees are charged for the loan over maintenance, maintenance of the loan account, and cheque books. Over some time, these fees could become a large cost of the loan. For example, there is a 100 Rupee fee per ATM transaction to withdraw money from the loan account.
Moreover, administrative expenses, such as your request for a cheque for loan payments, or your request to change repayment details may also attract the lender’s fees. These particular fees may appear negligible, but in aggregate, they can reduce the affordability of the loan.
8. The Risk of Taking Multiple Loans
The potential to take other loans in the future is also a hidden expense tied to personal loans. Taking out other loans is a necessity in many situations. The more loans you take, the more you are at risk to fall into a cycle of debt, due to paying interest on multiple loans with their associated fees.
If you’re having a tough time managing several personal loans, consider the possibility of loan consolidation. This way, you can simplify the process of managing several loans, while paying a lower interest rate, as well as saving on the administrative fees. Still, it’s necessary to analyze the consolidation’s guidelines, as well as determine if it’s the most beneficial option for you.