The allure of personal loans Personal loans are the most sought-after type of loan in India. They are unsecured, convenient, and can be availed for just about anything—medical emergencies, weddings, vacations, and the like. Personal loans are marketed by banks and fintech lenders as quick fixes, with instant approval and no hassle. However, while they might seem straightforward, personal loans end up being more expensive than borrowers anticipate. There are several sneaky traps that add to the actual cost of borrowing, surprises many first-time applicants.
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Trap 1: Leaving out processing charges and fees The majority of them are bothered only with the quoted rate of interest by the lender and ignore other costs such as processing charges, GST, and document charges. These could total between 1 to 3 percent of the loan, reducing the received money but maintaining the repayment constant. For example, on a ₹5 lakh loan, a 2 percent processing charge means that you will only receive ₹4.9 lakh, but pay interest on the whole ₹5 lakh.
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Trap 2: Random selection of longer tenure Opting for a longer repayment period reduces the monthly EMI, so the loan is not painful. But it also increases the overall interest outgo significantly. For instance, a three-year loan can be much cheaper in terms of interest compared to a five-year loan, with higher EMIs. Homeowners are often victims of this trick, paying a lot more in the long run just to keep monthly payables pleasant.
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Trap 3: Overlooking prepayment charges Early prepayment of a loan saves thousands of interest, but penal part-prepayment or foreclosure charges are charged by most lenders, especially in the first year. Hasty closers of loans end up paying steep charges that offset the interest saving advantage. Always read prepayment terms before signing, and choose lenders with flexible payment options.
Trap 4: Falling into low "teaser" rates Some lenders entice the borrowers with very low initial interest rates that later reset to very high rates. If they do not read the terms and conditions, the borrowers assume that they would remain paying the lower rate for the full duration. The sudden rise in EMIs will strain the finances and lead to default payments. Comparing lenders' annual percentage rates (APR) is a better way to analyse the cost of borrowing.
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Trap 5: Leaving out credit score impact Customers borrow more than one loan or approach more than one lender simultaneously without realizing that the hard credit checks lower their credit score. A low credit score draws higher interest rates or even loan rejection. Similarly, EMI defaults reduce creditworthiness and when customers borrow again, they pay more. Loan management is the way to keep costs minimum but also save money.
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How to borrow sensibly Personal loans aren't so bad in themselves—they can be a saviour if used prudently. The trick is to borrow only what you actually need, compare deals among lenders, and read the terms carefully. Knowing the total cost of the loan, instead of just the EMI, spares you from unpleasant surprises. With regular payment and smart planning, personal loans can remain a useful tool rather than an expensive trap.
![Trap 4: Falling into low "teaser" rates](https://images.moneycontrol.com/static-mcnews/2025/09/20250929071018_5.jpg "Trap 4: Falling into low "teaser" rates")
