Not just the interest rate, these 'hidden charges' make your personal loan expensive!
When taking out a personal loan, customers typically focus solely on the interest rate, while the true cost is hidden in numerous fees, such as processing fees and prepayment charges. Therefore, it's important to consider the Annual Percentage Rate (APR), not just the interest rate, before deciding on a loan to avoid financial difficulties later.
Whenever you apply for a personal loan, the first thing you notice is the interest rate, such as 10% or 12%. You think this alone will determine whether the loan is affordable or expensive. But the real story doesn't end there.
The truth is that the true and full cost of the loan is hidden behind that small rate, which we often overlook. Making a decision based solely on the interest rate can be a big mistake.
Let's say you're taking out a personal loan of ₹5 lakh for 3 years. If you get the loan at 11%, you'll have to pay approximately ₹89,296 in interest. However, if the bank charges 13%, this interest rate will jump to ₹1,06,491.
You see, just a 2% higher interest rate puts an additional burden of ₹17,195 on your pocket. Therefore, even a small difference in interest rate significantly increases your total cost.
Banks or NBFCs review your entire profile before granting you a loan. If you have a good salary, a stable job, and a strong credit score—meaning you've repaid past loans on time—then you're a low-risk customer. This means you can certainly get a loan at a lower interest rate. Maintaining a good profile can also make your loan cheaper.
In addition to interest, personal loans also have some hidden charges that are important to know about. If you don't know about them, you could be shocked later.
Processing fee: This can range from 1-3% of the loan amount and is deducted upon taking out the loan. Prepayment charge: If you want to repay the loan early, banks charge this as a penalty. Late payment charge: If you forget or are late paying your EMI in any month, you could have to pay a hefty penalty.
Before taking a loan, don't just look at the interest rate, but also the Annual Percentage Rate (APR). This rate includes interest, processing fees, and all other relevant charges.
This will give you a clear idea of the total cost of the loan. Also, be sure to use an EMI calculator and check if you can prepay the loan without incurring significant charges.