A personal loan is a great way to get the money you need to cover any last-minute expenses. Everyone knows that personal loans come with interest payable. However, there are many other hidden charges that you may have to pay when you apply for a loan. Not all lenders charge the same fees.
Here are some hidden charges you may have to pay.
What are the types of hidden charges with personal loans?
1. Loan processing fees
The lender will charge a small fee for handling the loan application. The fee covers the lender’s costs to manage and process the loan. The processing fees range from 0.5 to 2.5% of the loan principal. The exact rate may vary from one lender to another.
2. Verification fees
The lender will verify your identity and determine whether you can repay the loan. For this, the lender hires an independent agency to investigate your creditworthiness.
The independent agency will charge the lender a fee. The lender will, in turn, charge you a verification fee. Verification fees are between Rs. 250 and 750.
3. Default charges
Your monthly payments to the bank will depend on the principal amount, interest rate, tenure, income, and other factors. You are liable to pay EMI before the due date every month. However, you will be charged default charges if you miss an EMI payment.
The default charges are between 1 and 2% of the EMI amount. Therefore, you must select EMIs within your financial means.
4. Prepayment charges
You can prepay a part of the principal amount or repay the total loan in one payment if you have the funds. In this case, the lender will not receive any interest on the borrowed funds.
As a result, the lender charges a foreclosure fee of 2–4% of the loan amount. The prepayment fee can also depend on how far along you are in the repayment process. For example, if you have repaid half of the principal, the lender may charge you 1.5 or 2%. However, if you have paid only 10% or so of the loan, you may have to pay a higher fee.
5. Goods and Service Tax (GST)
Lenders will conduct various services during loan processing. For example, they run credit checks, take feedback from previous lenders, and so forth. Hence, you need to pay taxes on these services. You will be charged 18% GST on the home loan. This is one of the hidden charges that people rarely consider when applying for loans.
6. Fees for extra statements
Lenders will provide you with statements at regular intervals. For example, you may receive statements after every quarter. However, you can also request these documents from the lender. To get these statements, the lender will charge you Rs. 50–200.
How do you avoid paying hidden charges on personal loans?
You may have to pay six hidden charges with your loan application. Knowing about these charges is not enough. Hence, here are some ways to avoid hidden charges on a personal loan.
1. Examine the documents thoroughly.
While taking a loan, ensure you understand the terms, conditions, and clauses. This step is necessary to find any hidden charges. All fees charged by the lender are given in the loan agreement.
When checking the documents, check the personal loan interest rate, payback period, and repayment method. Cross-checking financial papers is a must-do.
Before signing the loan contract, take the time to read all the information carefully. Accepting a personal loan without reviewing the agreement is a grave mistake. It can lead to financial strain once your EMIs begin.
2. Set up a repayment strategy.
Decide on your repayment strategy before you apply for a loan. Before applying for a personal loan, use a personal loan calculator. It will help you determine the ideal repayment term and EMI based on your income.
Also, always opt for automatic deductions of the EMIs from your account via auto-debit or ECS if it is an option. The amount is automatically deducted from your account and paid towards your loan. Therefore, you need not worry about missing an EMI date. Setting up automatic payments will help you avoid late fees.
However, you should keep the required funds in the account; otherwise, the amount will not be deducted. This is a good strategy for people who do not remember to pay EMI.
3. Borrow money from a trustworthy financial institution.
Borrowing money from a reputable and authentic lender is crucial. It will ensure you trust the lender when applying for a loan. Conduct thorough research on the lender before you apply for a loan. You can read online reviews and the experiences of other customers to understand how the lender works.
You should also check the terms and conditions provided on the institution’s website to see whether you meet the criteria. It will help you understand if you qualify or if there’s a clause you do not agree with. You can then decide whether to apply for a loan with the institution or not.
With a personal loan, the money is disbursed into your account in one lump sum. There are restrictions on how you can spend the loan amount. This makes personal loans one of the best financial options available. However, there are additional hidden charges that you need to pay.
Banks and lending organizations may impose hidden charges on the loan amount. Hence, you must know about the fees you will incur. Read all documents carefully to understand which fees you will be charged and when.
In urgent need of funds? Apply for a personal loan with Piramal Finance now and get attractive interest rates.