Hidden Charges in Instant Loans You Should Know
Due to the rise of digital lending in India, instant loans have increased a lot. These loans are very useful during emergencies as it is available within a few hours. You can easily apply for it online with minimum paperwork. As these loans are easily available, borrowers just focus on interest rate, EMI and loan amount.
But these loans come with hidden charges which many borrowers are not aware of. This increases the borrowing cost of the loan. Some lenders disclose these charges in advance, and some try to hide them. It’s necessary to understand these personal loan hidden charges in advance to avoid extra expenses later on.
Major Hidden Charges on Instant Loans
Here is a breakdown of major hidden charges associated with instant loans: -
Processing Fees
Processing fees are one of the most common personal loan hidden charges. This a charge collected by lender for application processing, document verification and loan sanctioning. This can range from 1 to 3% of the loan amount. This is deducted by the lender on an upfront basis from the loan amount.
Suppose the loan amount is of ₹5,00,000 and the processing fee is 2%. Then you will have to pay processing fee of ₹10,000. This will be deducted by the lender.
Foreclosure or Prepayment Charges
You may want to pay off the loan as it can reduce your interest cost. However, this is one kind of loss for the lender, so they impose foreclosure or prepayment charges to discourage the early closure. These charges can range from 2 to 5% of the outstanding loan amount.
Prepayment means paying off the loan partially, and foreclosure means paying the entire loan outstanding before the tenure ends. Many lenders allow this only after completion of 6-12 EMI payments. Hence, before accepting the instant loan, you shall verify: -
- Whether the foreclosure charges and prepayment charges are there or not. Many lenders don’t have prepayment penalties.
- Minimum EMI completion required to foreclose or prepay the loan.
- Partial payment conditions.
- Charges applicable for early closure.
Late Payment Fees
If you miss the EMI due date or delay the EMI repayment, then the lender will charge you late payment fees. This can either be charged at ₹500 to ₹1,500 per late payment instance or 2-3% of the overdue amount. Hence you shall never skip the EMI as even single EMI will increase the borrowing cost.
Some borrowers just focus on monthly instalments and overlook these personal loan hidden charges. This can cost them a lot if the repayment discipline is not maintained.
EMI Bounce Charges
The majority of borrowers now pay the instant loan instalment through the auto-debit system, which is linked to your bank account. But if there is insufficient balance in the bank account on the EMI date, then EMI will bounce, and the lender will levy EMI bounce charges. These charges range from ₹300 to ₹500 per bounce.
The EMI bounce can happen due to: -
- Low account balance
- Technical banking issue
- Failed auto-debit instructions
- Incorrect account details
GST Charges
Majority of instant loan have GST charges of 18% on several loan-related fees. Loan interest is not subject to GST, but many loan-related charges like processing fees, prepayment charges and others attract GST charges.
How to Avoid Hidden Charges in Instant Loans?
The borrower should understand the personal loan hidden charges to avoid unnecessary charges. Here are some tips that can help: -
- You shall carefully read the Key Fact Statement before loan approval. It has complete details about additional charges levied by the lender.
- Compare loan offers from different lenders. Don’t just look at the interest rate, but compare various fees associated with the loan, which include processing fees, prepayment charges, EMI bounce charges, etc.
- Some lenders can reduce the fees for existing customers or borrowers who have a good credit profile. So, you shall try to negotiate the fees with the lender before loan approval.
- Check if the lender charges penalties for foreclosure or prepayment. Understanding these conditions in advance can prevent unexpected costs.
- Maintain a good credit score. Lenders offer better terms with fewer hidden charges to borrowers who have a good credit score.
- You shall have open communication with lender to understand the fee structure of your personal loan. You can ask questions and get clarification on any charges related query.
Conclusion
Instant loans apps offer immediate funds during emergencies. But the borrower should not just focus on interest and EMI amount while availing a loan. There are various personal loan hidden charges like processing fees, prepayment penalty, GST, etc., which increase the borrowing cost.
Borrower shall have proper understanding of these charges so that they may not have to face surprise later on. They should read the key fact statement carefully, negotiate with the lender and maintain a good credit score to avoid hidden charges.
