Personal loans are becoming the primary choice for an increasing number of people to cover larger expenses. One of the factors driving this growing popularity of personal loans is that they do not require collateral and have fairly quick processing times. A personal loan can be obtained from any banking or non-banking financial institution of your choice. And with the advent of digitisation and online credit options you can quickly get quick loans online sitting at your home.
With fintech firms enabling quick disbursements with minimal documentation, technology has been a true game-changer for the personal loan market. The credit outstanding for personal loans increased by 12.1% in 2021 compared to 2020. Personal loans like other financial products, have been augmented by digital services and the rise of instant loan platforms. The personal loan market has undergone massive transformation since the outbreak of the pandemic, albeit in a positive way.
Providers are now competing to offer loans and many of them often come with charges that borrowers may miss or overlook. As a borrower here are the 7 essential personal loan charges you should be aware of.
#1 Processing Charges for a Personal Loan
Whether processing and sanctioning a quick loan online or offline, financial institutions incur some administrative costs that they pass on to the borrowers. This amount varies from one financial institution to another, usually ranging from 0.5%-3% of the total loan amount. Every bank or non-banking financial institution establishes a minimum and maximum percentage of loan processing fees that a borrower must pay. You can pay this fee in advance or have it deducted from the loan amount when it is disbursed. Further, many also charge a non-refundable processing fee which means that even if you cancel the loan after it has been approved, the fee is not refunded.
#2 Verification Fees
Before a financial institution sanctions your loan, it must be confident that you will be able to repay it. To that end they may hire an outside agency or deploy an in-house team to verify your credentials. They analyse your credit scores as well as your loan repayment history. Because this is an additional cost the borrower must bear it.
#3 Goods and Services Tax (GST)
Loan-related services, such as prepayment and part-payment fees, processing fees, cancellation fees, duplicate statement issuing fees and so on are subject to GST which is currently charged at 18%. It should be noted, however that GST does not apply to interest costs.
#4 EMI Bounce Fees
Banks permit you to repay the loan in small amounts via equated monthly instalments or EMIs. It is your responsibility as a borrower to ensure that you have sufficient funds to pay your EMIs on time. Failure to do so may result in a penalty being imposed. This is why rather than rushing to pay off the loan with large EMIs, it is important to choose an EMI amount that you can afford.
#5 Prepayment/Foreclosure Penalties
Banks recoup their investment and generate profits via the interest you pay on loan. If you pay off your debt before the specified time period your bank suffers a loss as a result of you terminating your loan early and not paying the interest it anticipated. To compensate for this loss your bank may levy a prepayment penalty. A bank will typically charge a 2-4% prepayment/foreclosure fee. Many banks and non-banking financial institutions have a 6-12 months lock-in period. It implies that you will be unable to repay your personal loan during the lock-in period. Other instant loan platforms like EarlySalary allow you to prepay your personal loan without any penalties.
#6 Interest Rates
Personal loans have higher interest rates than alternatives like, say, home loans because they are unsecured loans. The interest rate on a personal loan varies from one financial institution to another. An individual’s interest rate on a quick loan online or offline is determined by their age, credit rating, job, creditworthiness and other factors.
#7 Charges For Duplicate Statement
If you need a duplicate statement of your EMI payment schedule or have lost track of the balance of your outstanding loan amount, you can contact your lender. For usually a small fee they provide you with these details.
Other than keeping in mind these standard charges to get a quick loan online or offline it is also a good idea to look into the minimum requirements for a personal loan. When it comes to the credit score, income and debt-to-income ratio that are acceptable to be approved for a personal loan, lenders may have different requirements. This can assist you in narrowing down the loans that may be the best fit for your credit and financial profile.