Shivam had taken a personal loan to buy equipment for his home office, so he could pursue higher-paying assignments as a freelance designer. He knew that the loan EMIs wouldn’t affect his monthly budget very much, and figured he could always pay more than the minimum once money started rolling in.
A few months down the road, he received a large payment and decided to pay off the remaining loan amount in full. After transferring the payment to his loan account, he forgot all about it until receiving a notice from the bank saying his loan was overdue!
Here’s what happened – When Shivam prepaid his pending loan, he forgot to account for the pre-closure and prepayment penalties mentioned in the fine print. As a result of these being added to his dues, the loan remained active. Since he stopped checking the account after the final payment, Shivam did not realize this small amount remained to be paid. It even incurred an additional late payment fee!
Moral of the story? Always check and double-check personal loan charges and fees before signing up or even applying for one.
Watch for these 5 hidden costs:
- Processing Fees & GST – In addition to GST, lenders will either charge a processing fee upfront or deduct it from the loan amount before disbursal. This fee is usually non-refundable even if your loan application is not approved, so get it in writing if a lender claims they will refund it.
- Cancellation/Foreclosure Charges – Cancelling your loan or paying it off early, like Shivam did, involves its own penalties and charges. You may also be charged extra for requesting a duplicate statement at any point, or asking for an NOC/no dues certificate after paying off the loan.
- Pre-Payment Penalties – Even if you aren’t paying off the loan in full, be careful about paying anything more than your EMI. Banks lose out on interest they could have earned on the extra money you’re paying, and make up for it by charging you 2-5% of the outstanding loan amount.
- Late Payment Charges – This is one of the most common traps that people fall into with personal loans, credit cards and other loan instruments. Late payment fees could be 2-3% of your EMI amount, and you will be charged additional interest on the late fee at a much higher rate than your loan!
- Annual Interest Rates – With a traditional personal loan, the annual interest rate charged by the bank will remain the same throughout the tenure of the loan. This is unlike a personal line of credit, where you may pay lower interest depending on the EMI tenure you choose for each spend.
If you’re looking for a personal loan, check for hidden charges that can catch you off-guard sometime in the future. Or, simply download MoneyTap, which provides flexible loans through a personal credit line with no charges for prepayment or application!