Loan Tips: Know these 5 things before taking a loan, otherwise you will wonder why you took it?

Nowadays, everyone considers taking out a personal loan at some point. Whether it's for a medical emergency, a child's education, or a home renovation. Banks and NBFCs now approve loans in minutes, but have you ever considered what other charges are levied beyond the interest rate?

People are often happy just by looking at the EMI, but when strange charges start getting deducted from their bank account, they are left in a state of shock. These charges may seem small, but they can add up to thousands of rupees. So, let's understand the five charges every loan borrower should be aware of beforehand.

1- Loan Processing Fee
Before approving a loan, the bank levies a fee called a processing fee. This fee is to cover the bank's administrative costs. This fee typically ranges from 0.5% to 3.93%. Some banks deduct this from the loan amount at the time of disbursement. Most importantly, it is non-refundable. This means you won't get your money back even if your loan is rejected.

For example, if you took out a loan of ₹5 lakh and the processing fee is 2%, you would have to pay ₹10,000. This means you would actually receive only ₹4.90 lakh.

2- Prepayment or Foreclosure Charges

Even if your financial situation improves and you want to repay the loan before the due date, banks are not happy. This means they lose the interest income they were supposed to receive. Therefore, they impose a penalty called a prepayment charge or foreclosure charge.

This charge can range from 2% to 5% of the remaining loan amount. Some banks only allow prepayment after 12 EMIs have been paid. Some NBFCs offer zero charges, but these apply to other conditions. So, if you're considering early loan closure, be sure to read the bank's Key Fact Statement (KFS), as it clearly states when and under what conditions prepayment is possible.

3- Late Payment Penalty
Sometimes EMIs are delayed due to inadvertence or lack of funds. But banks don't forget this.
Late EMIs attract a 1% to 2% charge, which is deducted along with the next month's EMI. Some banks also send EMI alerts, but some don't.

If this happens repeatedly, two major consequences can occur. First, your credit score will drop. Second, banks will hesitate to offer you another loan. Some banks even charge additional interest on overdue EMIs, further increasing your total payment. Therefore, try to auto-debit every EMI to avoid any inadvertent delays.

4- Loan Insurance
Banks often try to sell you another product along with the loan, which is loan insurance. They claim that if you are unable to repay the loan for any reason, the insurance will cover your loan. This product generates significant revenue for banks, as most people repay their loans, and those who do not are charged for recovery.

5- Stamp Duty
This varies by state. Stamp duty is a government fee charged to validate a loan agreement or legal document. When taking out a personal loan, this charge is paid at the time of signing the loan agreement. The amount depends on the loan amount, the type of bank or NBFC, and state regulations. This is usually a small percentage of the loan amount, such as around ₹500 for ₹5 lakh. Paying stamp duty makes the loan agreement legally valid and protects both parties in case of a dispute.

How to avoid these charges?
Compare 2-3 banks before taking a loan.
Be sure to read the Key Fact Statement.
Pay EMIs on time.
Set EMIs to auto-debit.
If your salary date changes, change your EMI date as well.
Lend only as much as you need.

Conclusion
Taking a personal loan is easy, but it's important to understand it. Things like processing fees, prepayment charges, late penalties, and bounce charges may seem small, but they can be a drain on your wallet. When taking a loan, carefully read the bank's terms and conditions and understand every detail.

Disclaimer: This content has been sourced and edited from Zee Business. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.