‘Cheap’ offer of personal loan may turn out to be very expensive! Know how you can escape from this trap

Do you often receive messages about low interest rate personal loans on your phone? If yes, then it is very important for you to know some things before accepting any such offer. Many times people decide to take a loan immediately after seeing the interest rate of 10-11%, but when you go deeper into it, then it comes to light that this ‘cheap’ offer is actually a very expensive deal.

Even 1-2% difference in interest rate has a big impact on the pocket.

Let us understand this with a small example. Suppose, you take a personal loan of Rs 5 lakh for 3 years at an interest rate of 11%. You will be surprised to know that in 3 years you will pay approximately Rs 89,296 as interest on this loan. Now if this interest rate is 13%, then you will have to pay Rs 1,06,491. This means that just 2% interest rate increase takes more than Rs 17,000 out of your pocket.

Banks charge more than just interest!

Experts say that while taking a loan, people often pay attention only to the interest rate. They completely ignore other expenses like processing fees and prepayment charges.

• Processing Fee: Most banks or NBFCs charge a processing fee on personal loans, which can range from 1 to 2 percent of the loan amount. You do not have to pay this money separately, rather the bank deducts it at the time of giving the loan and sends the remaining amount to your account. Meaning, if there is a processing fee of Rs 10,000 on a loan of Rs 5 lakh, then only Rs 4,90,000 will come to your account.
• Prepayment Charge: Even if you want to close the loan by prepaying it, you may have to pay a penalty, which is called prepayment charge.

Your credit profile determines the interest rate

Banks or NBFCs do not give loans to anyone at the same interest rate. Before giving a loan, they look at your credit profile, which includes your credit score, your job record and past loan repayment history. If all this is good, you can get a loan at a lower interest rate. But if your profile is weak, then banks offer you loan at higher interest rates. Many times, due to urgent need of money, people take expensive loans out of compulsion and banks take advantage of this.

Ask these questions to the bank before saying ‘yes’ to the loan

Next time you get a personal loan offer, ask some important questions before saying yes:

1. What is the processing fee? What is the percentage of processing fee on the loan and can it be reduced?
2. Are there any other hidden charges?
3. Will there be a penalty for repaying the loan early? If you want to close the loan prematurely, how much prepayment charge will you have to pay?
4. Can processing fees be waived? Sometimes banks waive processing fees for customers with good credit history, so don’t hesitate to ask about it.

Remember, while taking a personal loan, it is important not to be hasty but to be wise.