Before you borrow: The real cost of personal loans

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The interest rate that you see when you apply for a personal loan is only the tip of the iceberg. For instance, if you borrow Rs 5 lakh at 11 percent for three years, it would cost you approximately Rs 89,296 in interest; if the rate is 13 percent, you'd pay about Rs 1,06,491-an additional Rs 17,195 only for a 2-point higher rate. In addition, lenders also levy processing charges, prepayment fees and apply different pricing on your credit score, employer profile, and tenure.

Lenders price personal loans on how risky you are to them. If you have a good salary, stable employment, and good credit history, you will probably get a much lower rate. Also, extending the loan tenure can reduce your monthly EMI but significantly increase the total interest you pay. It's essential to balance what you can afford today against what it will cost you over the life of the loan.

Apart from interest, most personal-loan offerings have hidden expenses. Processing charges can add up to 1-3 percent of the loan amount, while early closure or part-payment attracts penalties and late payment charges that shoot up the cost. All these eat into the loan's affordability, yet they are often overlooked by borrowers focused only on the rate.

First, multiple lenders should be compared not on interest rates but the annual percentage rate (APR), which captures interest plus one-time and processing fees. An EMI calculator will also help estimate the monthly burden and total payment amount over a tenure. Make sure your EMI fits well within your budget so that you're not squeezed when unexpected costs arise. Finally, check that prepayment is allowed without an exorbitant charge, so you are free to reduce cost later when possible.

Personal loans can be a useful credit tool, but they can only be helpful if you treat them like a financial commitment instead of a quick fix. Understand the full cost of borrowing, evaluate your needs, and compare offers with caution to avoid any surprises that crop up along the way.