Personal loans are a popular financial tool for meeting urgent expenses, but borrowers often overlook hidden charges that increase the overall cost of the loan. Understanding these charges can help you make informed borrowing decisions and avoid unnecessary expenses. Here are some hidden charges in personal loans that every borrower must watch out for.
1. Processing Fees
Lenders charge a processing fee for approving and disbursing your loan. This fee typically ranges from 1% to 3% of the loan amount and is deducted before disbursal. Always check the processing fee before applying for a loan.
2. Prepayment or Foreclosure Charges
If you plan to repay your loan before the tenure ends, lenders may impose prepayment or foreclosure charges. These charges can range from 2% to 5% of the outstanding loan amount. Some banks allow partial prepayment without charges after a specific period.
3. Late Payment Penalties
Missing an EMI payment results in a penalty that can be a fixed amount or a percentage of the overdue EMI. Additionally, late payments negatively impact your credit score. Always ensure timely EMI payments to avoid penalties.
4. Loan Cancellation Fees
If you decide to cancel your loan after approval but before disbursement, lenders may charge a cancellation fee. Some lenders refund the processing fee, while others do not, leading to financial loss.
5. Loan Restructuring Fees
If you request a change in your repayment terms due to financial difficulties, lenders may charge a restructuring fee. This fee varies depending on the lender and the loan amount.
6. Stamp Duty and Legal Charges
Stamp duty and legal charges apply to loan agreements and vary based on the lender’s policy and state regulations. These charges are often not highlighted upfront but can add to the cost of borrowing.
7. Conversion Charges for Interest Rate Change
If you wish to switch from a floating interest rate to a fixed rate or vice versa, lenders may charge a conversion fee, typically ranging from 0.5% to 2% of the loan amount.
8. Duplicate Statement or Document Charges
Lenders may charge a fee if you request duplicate loan statements, foreclosure letters, or other documents. The cost may vary from ₹100 to ₹500 per request.
9. Balance Transfer Charges
Transferring your loan from one bank to another for lower interest rates incurs balance transfer fees, usually around 1% to 2% of the outstanding amount.
10. Default Charges
If you fail to repay the loan within the agreed timeframe, lenders may impose additional default charges, increasing your financial burden.
While personal loans offer quick financial assistance, hidden charges can significantly increase borrowing costs. Always read the loan agreement carefully, compare lenders, and clarify all applicable charges before signing the contract. Being aware of these fees ensures you make a cost-effective and informed financial decision.
