5 hidden clauses in personal loan agreements you can’t afford to miss

Hidden costs in personal loans

Personal loans are a convenient option when you need money — for a medical emergency, wedding, or holiday. But before making that commitment, it's better to sit back and read the fine print. Lenders tend to put conditions into the agreement that may surprise you later on, and you may stand to lose money or be anxious if you overlook them.

Prepayment and foreclosure charges

All borrowers feel that they will pay back the loan ahead of schedule and avoid paying interest. But, the majority of banks and NBFCs charge prepayment or foreclosure fees if you pay the loan ahead of the scheduled period. These charges may be anywhere between 2% to 5% of the outstanding amount. Thus, before you plan to prepay your loan, keep in mind what exactly the policy of your lender is concerning prepayment.

Late payment and default penalties

It's widely known that skipping an EMI can damage your credit rating. But little attention is paid to the penalty provision that includes additional expenses for delayed payments. While a portion of lenders fix the fee, others charge a percentage of the outstanding EMI. The delay of a few days can add up, so it's preferable to install auto-debit orders and spare yourself any unpleasant surprises.

Hidden processing and service fees

Although the rate of interest is explicitly given by lenders, processing charges, documentation charges, and GST often go unnoticed. Even foreclosure letters and loan statements might be charged by some institutions. Ask for a breakdown of all costs in detail before signing — the finally disbursed amount would be a little less than what you had applied for, owing to these deductions.

Clauses on changes in interest rate

If your personal loan is on a floating rate, your EMIs may fluctuate based on changes in benchmark interest rates. The agreement often specifies when and how such revisions are applied — quarterly, semi-annually, or annually. Understanding this clause ensures you’re not caught off guard if your EMI suddenly increases.

Cross-selling and insurance tie-ins

Personal loans typically come with insurance policies designed to cover the borrower if he or she loses a job, becomes disabled, or dies. Sounds like a lifeboat, but usually these riders are optional — although a few creditors secretly make them mandatory. Always make sure you actually need such insurance and that the premium is worth paying before you sign on the dotted line.

FAQs

1. Can I refuse to buy insurance bundled with a personal loan?
Yes, insurance is not compulsory. You can opt out unless actually stated to be compulsory by the lender, which is unusual in the case of personal loans.

2. What if I prepay my loan partially?
Prepayment partially will reduce your outstanding balance and interest charge, but lenders still may charge you a tiny fee. Always check the specific clause in your contract.

3. Are processing fees refundable if my loan is declined?
No, the majority of lenders do state that processing fees are non-refundable in case your application is not approved.