Planning to take a personal loan? Hold on a minute! Many people take out loans and later get a shock when they see the bill – the EMI increases or the total payment becomes much higher due to extra charges.
These hidden charges are hidden in the small print of banking rules, which can be boring to read. But with a little smart thinking, you can avoid these charges and save a lot of money. Let’s understand in simple terms what these charges are and how you can avoid them.
How To Avoid Hidden Charges In Personal Loan
Processing Fee: The Most Common Charge
When you apply for a loan, the bank charges a processing fee – this can be up to 1–2% of the loan amount. Some banks have zero processing fees, but most do.
How to avoid it?
When comparing loans, don’t just look at the interest rate, also check the processing fee. Some banks offer zero processing fee offers, prefer those. And if there is a fee, try to negotiate. If you have a good credit score, the bank might agree.
Prepayment or Foreclosure Charges: Punishment for Paying Early
If you finish your loan early (prepayment) or close it completely in one go (foreclosure), the bank charges a fee. This can be 2–5% of the remaining amount. It is usually higher in fixed-rate loans.
How to avoid it?
Read the terms and conditions when taking out a loan and choose a loan that has zero or low prepayment charges. According to RBI rules, there is no prepayment charge on floating-rate personal loans.
Late Payment Penalty: Don’t Miss Your EMI
If your EMI is late, a penalty is charged. This can be a flat fee or an extra percentage on the interest. It may seem small, but if it happens repeatedly, it adds up significantly.
How to avoid it?
Set up auto-debit from your bank account so that the EMI is deducted on time. If you ever miss a payment, pay it quickly. Otherwise, both the penalty and interest will increase.
GST and Other Taxes: These Are Inevitable
18% GST is levied on processing fees, legal charges, or documentation fees. This is not hidden, but people often forget about it.
How to avoid it?
You cannot avoid it, but include it when calculating the total cost so you do not get a surprise later.
Documentation and Legal Charges: Small but Significant
Some banks charge separately for document verification or legal checks. These usually range from ₹500 to ₹2000.
How to avoid it?
Compare loan offers and choose a bank where these charges are already included in the processing fee.
EMI Bounce Charges: If Cheque or Payment Fails
If there is not enough balance in your account and the EMI bounces, a charge of ₹300–500 is levied.
How to avoid it?
Always maintain sufficient balance in your account and keep auto-debit enabled.
Other Hidden Traps: Watch Out for These Too
Insurance Add-on:
Banks sell insurance with loans, which is optional but often forced on customers. Refuse it if you do not need it.
Zero Interest Offers:
Some apps or schemes advertise zero interest, but the processing fee or service charge is so high that the total cost increases significantly.
Swapping Charges:
If you transfer your loan from one bank to another (balance transfer), the old bank charges a fee.
| Charge Name | How Much Can It Be | How to Avoid |
|---|---|---|
| Processing Fee | 1–2% of Loan Amount | Choose a bank with zero fee offers |
| Prepayment Charge | 2–5% of Remaining Amount | Take a floating rate loan or one with zero charges |
| Late Payment Penalty | ₹300–500 + Extra Interest | Set up auto-debit |
| GST | 18% on fees | Cannot be avoided, include it in calculations |
| Documentation Charge | ₹500–2000 | Choose a bank with included fees |
| Bounce Charge | ₹300–500 | Maintain sufficient balance in your account |
Pros and Cons
Pros (For Taking a Smart Loan):
- Choosing the right bank can save you thousands of rupees.
- If you have a good credit score, you can negotiate and get the charges reduced.
- Prepayment is free in floating rate loans.
- Zero processing fee offers save you money initially.
Cons (Mistakes to Avoid):
- If you do not read the terms, you end up paying extra.
- Late payments damage your credit score.
- Add-ons like insurance make the loan more expensive.
- The old bank charges a fee for balance transfers.
Conclusion
Before taking a personal loan, read all the terms carefully, compare offers from different banks, and ask about hidden charges. Choose a loan with zero processing fees or free prepayment, keep auto-debit enabled, and avoid unnecessary insurance.
This way, you can save a lot of money and the loan will be stress-free. If you have any doubts about a specific bank, ask in the comments, I will help you. Have you ever taken a loan and gotten caught by hidden charges? Tell me!
