Taking a personal loan has become easier in today's time, but it comes with several hidden costs that can become a financial burden later. Expenses such as processing fees, foreclosure charges, EMI bounce penalties, insurance premiums, and GST significantly increase the total cost of the loan. Therefore, it is crucial to obtain complete information about all charges from the bank or NBFC before taking a loan to avoid unnecessary expenses later.
Personal Loan: The demand for personal loans is increasing because they are readily and easily available. Banks and non-banking financial companies (NBFCs) are providing instant funds by simplifying paperwork. However, despite paying attention to the loan's interest rate and EMI, people often overlook hidden costs. These hidden costs include processing fees, foreclosure charges, EMI bounce penalties, insurance premiums, and GST, which can unexpectedly increase the total cost of the loan. Therefore, it has become necessary to gather complete information about all these expenses before taking a personal loan.
Hidden Costs of Personal Loans: Detailed Information
The Difference in Processing Fees
Most banks and NBFCs charge a processing fee of 1 to 3 percent of the loan amount. This fee is deducted before the loan amount is disbursed. For example, if you take a loan of ₹5 lakh and the processing fee is 2 percent, you will actually receive ₹4.9 lakh, while you will have to pay back ₹5 lakh. This results in a lower amount reaching your account initially, but your debt remains the full amount.
Caution with Foreclosure Charges
If you want to repay the loan amount before the stipulated period, the bank or NBFC charges a foreclosure fee. This charge can be 2 to 5 percent of the outstanding loan amount. In such a case, the foreclosure charge may outweigh the savings from early repayment. Therefore, make a thoughtful decision before deciding to repay the loan ahead of schedule.
Penalty on EMI Bounce
If your EMI is not paid on time or bounces in auto-debit, the bank may impose a penalty of ₹500 to ₹1000. In addition, your credit score may also be affected, which impacts future loan applications. Therefore, ensure sufficient funds in your account before the EMI date.
Additional Cost of Insurance Premium
Often, banks add insurance policies like personal accident cover or loan protection insurance with personal loans. These are not mandatory, but you have to pay the premium, which, along with the interest, increases your total cost. Before taking a loan, clarify whether you are being charged an insurance premium and whether you want to accept it or not.
Impact of GST
An 18 percent GST is also levied on processing fees, foreclosure charges, and late payment penalties. This means that the tax increases with every charge, increasing your total cost. Do not take a loan based solely on the interest rate; instead, correctly calculate all these charges and GST as well.
What to Ask the Bank Before Taking a Loan?
- What will be the total amount of the processing fee?
- What percentage can the foreclosure charges be?
- Is there any insurance policy associated with the loan? If yes, what is its cost?
- What is the penalty for EMI bounce?
- How much total GST will have to be paid?
By getting answers to these questions, you can assess the total cost of your loan and avoid any hidden expenses.
Take a Loan Wisely
A personal loan certainly provides financial assistance during times of crisis, but a loan taken without complete information and planning can also increase difficulties. Pay attention to hidden expenses along with the interest rate and EMI. Only a loan taken with complete information and proper planning can maintain your financial security and economic balance.
