While borrowing a personal loan, most borrowers usually consider the interest rate and EMI as key factors. However, lenders always add additional fees which increase the working cost of the loan. Being conscious about these fees can aid in making the right decision. In this blog, we will find out the impacts of the additional fees and how it affects the process of applying for a loan alongside detailing various methods of avoiding them.
1. Processing Fees: The Initial Cost You Pay
Lenders charge a processing fee to cover administrative expenses for loan approval. This fee usually ranges between 1% to 3% of the loan amount and is non-refundable. Some banks may offer zero processing fees as a promotional offer, so it’s wise to compare lenders before applying.
How to Avoid It?
Research lenders and find one without such a fee, or at the very least a lower one.
Avoid searching in the offseason where lenders are known to charge such fees.
Bargain and negotiate the prices of such fees with lenders and see if they’re willing to add discounts for loyal customers.
2. Prepayment and Foreclosure Charges: Paying Off Early Might Cost You
If you plan to repay the loan before the tenure ends, lenders may charge a prepayment or foreclosure fee. This fee can range from 2% to 5% of the outstanding amount. Some banks allow prepayment only after a fixed period, so ensure you read the terms carefully.
How to Avoid It?
Select a lender that does not fine clients for prepayment
Choose a loan that has no restrictions regarding foreclosure.
Set the terms of the prepayment when you sign the loan agreement.
3. Late Payment Penalty: A Costly Mistake
Missing an EMI payment can lead to hefty late payment penalties, which may be 2% to 4% of the overdue EMI. This also affects your credit score, making it harder to get future loans.
How to Avoid It?
Set reminders for the due dates or automate payments.
Do ensure that you have funds in your account for the payment before it is due.
Think of having a spare bank account designated for EMI payments.
4. Loan Cancellation Fees: Changing Your Mind Comes at a Price
If you decide to cancel the loan after approval, lenders may charge a cancellation fee. Additionally, they might not refund the processing fee, adding to your financial loss.
How to Avoid It?
Only apply for a loan that you know you can take.
Always read the terms for cancellation of the agreement before signing it.
Inquire about refund policies concerning cancellation.
5. Cheque Bounce Charges: A Penalty for Insufficient Funds
If your EMI payment cheque bounces due to insufficient funds, banks impose a penalty ranging from ₹500 to ₹1,500 per instance. Multiple cheque bounces can also negatively impact your creditworthiness.
How to Avoid It?
Keep a reasonable amount of money in your bank account.
Make use of recurring ECS (Electronic Clearing Service) or auto-debit facilities for EMI payments.
Get balance alerts via SMS or email notifications.
6. Conversion Charges: Switching Loan Types Costs Money
Some lenders allow borrowers to switch from a floating interest rate to a fixed rate or vice versa. However, this conversion attracts a fee of 0.5% to 2% of the outstanding principal.
How to Avoid It?
Make a calculation regarding the costs and advantages of a conversion before making a switch.
At the start, choose the right interest type to avoid making unnecessary changes.
Always consult with financial experts before deciding on anything drastic.
7. Stamp Duty and Legal Charges: The Hidden Regulatory Costs
In certain states, borrowers must pay a stamp duty fee when availing a loan. Additionally, lenders may charge legal fees for loan documentation, especially for high-value loans.
How to Avoid It?
Look up state-specific stamp duties before applying.
If possible, try to negotiate legal fees with the lender.
Check if stamp duties are considered as part of the overall loan offer.
8. GST on Loan Charges: The Indirect Cost You Pay
All service charges on loans, including processing fees and penalties, attract an 18% GST. This increases the overall loan cost.
How to Avoid It?
Bear this expense in mind when estimating the sum of all expenses for the loan.
Seek out other lenders who do not have hidden GST charges.
Make sure to get a proper breakdown of costs associated with the loan before giving the go ahead.
Final Thoughts: How to Avoid Hidden Loan Charges?
Read the fine print: Always go through the loan agreement carefully before signing.
Compare lenders: Choose banks or NBFCs with minimal hidden fees.
Ask for a fee breakdown: Request a list of all applicable charges before applying.
Ensure timely repayments: Avoid late payments to save on penalties and protect your credit score.
Use online loan calculators: Estimate your total repayment amount before borrowing.
Check lender reviews: Read borrower experiences to identify hidden costs.
Conclusion
Knowing extra expenses can protect you from disastrous financial outcomes. Always try to remain proactive, know which questions to ask, and compare loans with utmost precision to ensure that you make the most prudent financial move.
If you’re seeking a personal loan that has no or transparent hidden fees, then get in touch with The Lending Monk and enjoy the best loan offers with the least amount of hidden charges