Personal loans are the most easily available loans; this is to say that getting a personal loan requires almost negligible documentation. The lender looks at the income level of the applicant; if the credit score is healthy and the applicant matches the income eligibility set by the financial institution then getting the personal loan approved is a cakewalk. Some FIs may sanction this loan within twenty four hours too.
A Little More About Personal Loans……..
Moreover personal loans can be used for any purpose thus they can come in handy at various occasions and the borrower can use them for varied reasons. Well all this may sound very lucrative but remember personal loans are unsecured loans which means they have no asset/collateral backing them. This makes them risky for the lender; the FI has nothing to fall back upon in case the borrower defaults.
The rate charged by any lender for the loan is commensurate with the risk associated with lending to a particular individual. Thus higher the risk perceived higher the interest rate charged; personal loans due to their inherent quality are risky for lenders hence are almost the most expensive loans available in the market. If one looks at personal loan interest rates, they will realize that they are way higher than other loans like car loan, education loans and home loans.
Personal Loan Fees:
As we discussed above these loans are available at very steep rates but apart from the EMIs you need to be pay every month, there are other fees also to consider. Though applicants focus a lot on the interest rate charged by the lenders for the loan the often forget to consider the other fees and charges which can prove to an equally big burden. Some of these fees may be known to the applicant while some may not be and they may realize this only when they are asked to pay it.
Some of the fees charged by lenders include documentation fees, processing charges and charges on pre payment of the loan. While these are some routine charges and are charged for all applicants there maybe some charges which might be incidental like the cheque return charges or late payment charges which may be due if the borrower defaults on a payment or a payment is delayed. Apart from that a charge maybe levied on the outstanding amount every month; this will be over and above the applicable interest rate.
Processing fee on a loan ranges from 2% to 3% on a loan depending on the bank’s policy. So for a loan of Rs. 300,000 you will have to shell out an amount anywhere between Rs. 4,000 to 6,000. Though pre-payment penalty is frowned upon by the RBI and most lenders have done away with it, some lenders may still continue to charge it and this also varies from 2% to 3%. Some banks may impose penalty if the pre-paid amount exceeds a certain loan proportion or is repaid within a certain time period and so on. Documentation and administration fees also need to be checked.
Let us consider a few examples; HDFC Bank charges nil processing fees, allows pre-closure after first year and charges 4% of principal outstanding amount. ICICI Bank charges Rs.1149 to 2.5% of the loan amount as processing fee, allows pre-closure after 6 months and pre-closure charges are 5% of outstanding amount. Some other charges include PDC charges, cancellation charges, swapping charges, duplicate NOC charge etc. As said earlier some may or may not be charged by various lenders, some are incidental too. Processing fees charged by Kotak Mahindra Bank is up to 2% of the loan amount while Standard Chartered Bank does not charge any processing fees.
Why are these Fees Important?
The lenders when advertising their loans talk about only interest rates and nothing else. Often these fees remain hidden from the customer till he has applied for the loan and the ball is set rolling. Then it might not be able to reverse the process. One may end up realizing that the lowest interest came with high charges thus making it more expensive than expected. Processing fees cheques are not returned even if the loan is not accepted so make sure you are sure about all these aspects when applying for the loan.