Personal loans can be a lifesaver when you need quick access to funds, whether it's an emergency, wedding, or even a vacation. However, did you know there are hidden charges in a personal loan and how they can affect you?
Before diving into how to avoid hidden charges, Let’s understand what the charges are and why they even exist. Hidden charges are fees that are not clearly shown when you apply for a loan. These could include processing fees, prepayment penalties, late payment fees, and more.
What are Processing Fees?
Processing fees are charges that lenders impose for processing your loan application. This fee is a percentage of the loan amount and is deducted before the final loan amount is disbursed to you. For example, if you are taking a loan of ₹5,00,000 and the processing fee is 2%, the lender will deduct ₹10,000, and you will receive ₹4,90,000.
Negotiate with the Lender: You can ask the lender to lower or remove the processing fee, especially if you have a good credit score.
Compare Different Lenders: Some lenders might offer lower or no processing fees during special promotions. Always compare fees from different lenders before choosing a loan.
Look for Online Lenders: Online lenders often have lower processing fees than banks.
Important to Know: Processing fees are non-refundable, so make sure you want the loan before applying.
What are Prepayment and Foreclosure Charges?
We learned that prepayment refers to paying off a portion of your loan before the due date. If you want to pay a small amount or the full amount of the loan before the due date is called foreclosure. Many lenders are charging a fee called Foreclosure Charges. While prepaying or foreclosing can save you on interest, many lenders charge a fee for this, often ranging from 2% to 5% of the outstanding amount.
Choose a Lender with No Prepayment Penalty: Some lenders allow you to repay your loan early without extra charges. Look for these lenders if you plan to pay off your loan early.
Understand the Terms: Lenders also agree that you make partial prepayments without charges after a certain time, like after the first year. Check these terms before signing the loan agreement.
Negotiate: If you have a strong relationship with the lender or a good credit history, you might be able to negotiate to reduce or eliminate these charges.
If you miss a payment or pay after the due date, lenders will typically charge a late payment fee. This fee can be a flat amount or a percentage of the overdue amount.
Set Up Auto-Debit: As your bank makes an auto debit. It helps you to never miss a payment.
Use Payment Reminders: This is by default that every bank will message and call you for a reminder on loan. If you didn’t get any calls, ask your lender to do so.
Maintain an Emergency Fund: Keep a small emergency fund to cover your EMI in case of unexpected expenses or cash flow issues.
Lenders charge 18% GST on processing fees, prepayment charges, and other services. Although this isn't a hidden charge, many borrowers forget to include it when calculating the total cost of the loan.
Calculate Total Costs: Always include GST when calculating the total cost of your loan. For example, if your processing fee is ₹10,000, the GST on it would be ₹1,800, making the total cost ₹11,800.
Ask for a Detailed Fee Structure: Request a detailed fee structure from your lender that includes GST to avoid surprises.
Some lenders offer insurance policies with personal loans, either as a requirement or an option. These policies might cover the loan if you die, become disabled, or lose your job. However, the insurance premium is usually added to the loan amount, which increases your total debt.
Opt-Out If Not Needed: If the insurance is optional, you can choose to opt-out. Evaluate whether you really need the insurance and whether it justifies the additional cost.
Compare with External Policies: Sometimes, you can find similar insurance coverage outside the loan package at a lower cost. Compare before making a decision.
Read the Fine Print: Make sure you understand what the insurance covers. Sometimes, these policies have many exclusions and might not provide the protection you expect.
Lenders might charge fees for processing your documents and handling administrative tasks related to the loan. These fees are usually small but can add up, especially if they aren’t mentioned clearly at the start.
Request a Fee Breakdown: Ask your lender for a detailed breakdown of all fees, including documentation and administrative charges.
Negotiate: Some lenders may be willing to waive or reduce these fees, especially if you have a strong credit history or are taking a large loan.
For secured loans or large amounts, lenders might charge legal fees to cover property document checks or loan agreement drafting. These fees can be high and are sometimes not clearly mentioned initially.
Understand the Requirement: Ask the lender if legal fees are necessary for your loan type. Sometimes, these fees are avoidable.
Negotiate: If legal fees are mandatory, try to negotiate the amount or seek a waiver.
If you want to switch from a floating interest rate to a fixed rate, or vice versa, during the tenure of your loan, lenders may charge a switch fee. Similarly, if you wish to convert your existing loan into another loan with a different term or interest rate, a conversion fee may apply.
Consider Your Loan Terms Carefully: Before opting for a loan, consider whether you prefer a fixed or floating rate to avoid switching later.
Negotiate Upfront: If you foresee the need to switch or convert, negotiate the fees upfront when taking the loan.
| Hidden Charge | How to Avoid |
|---|---|
| Processing Fees | Negotiate with the lender, compare lenders, opt for online lenders |
| Prepayment and Foreclosure Charges | Choose a lender with no penalty, understand the terms, and negotiate. |
| Late Payment Fees | Set up auto-debit, use reminders, maintain an emergency fund. |
| GST | Calculate total costs including GST, ask for a detailed fee structure. |
| Insurance Charges | Opt-out if optional, compare with external policies, read the fine print. |
| Documentation and Administrative Fees | Request a fee breakdown, negotiate. |
| Legal Fees | Understand the requirement, negotiate if possible. |
| Switch and Conversion Fees | Decide on the loan structure upfront, negotiate fees before disbursal. |
Hidden charges in personal loans are like a surprise. You don’t know the hidden charges and finally, the lender asks you to make these payments right? So, understanding the general charges in your personal loan application can help you in negotiating with lenders and asking for a waiver.
Hidden charges are fees that aren’t obvious when you apply for a loan. They can include processing fees, prepayment penalties, late payment fees, and others.
You can avoid hidden charges by negotiating with your lender, comparing different lenders, reading the loan agreement carefully, and asking for a detailed breakdown of all fees.
No, processing fees are non-refundable even if you choose not to take the loan after it has been approved.
Late payments can negatively affect your credit score and may lead to additional fees.
Yes, many hidden charges can be negotiated, especially if you have a good credit history or a strong relationship with the lender.
No List Founds!
Your email address will not be published. Required fields are marked *
