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Tips for Personal Loans – Undering Various Types of Charges That Bank Charge Which Increase the Cost of Loan
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Whenever you apply for a Personal Loan, you will come across certain terms relating to the charges by banks. These charges vary from bank to bank and actually affect the overall cost of your loan. Therefore, there is a need to understand these and keep in mind while deciding the bank from which you wish to take loan, as you will always wish to get the loan which is cheapest overall. Below we explain some of the terms, and how they affect your cost of the loan :
Ad 1. Rate of Interest : (a)Fixed Rate of Interest : Under these type of loan the interest rate remains the same for full tenure of the loan Thus, in these cases the rate of interest to be paid is fixed at the time you take the loan. This also means that the borrower knows the exact amount of EMI that he/she will need to pay in the future or at least he/she knows the exact interest rate to pay for the outstanding loan at that time. (b)Floating Interest Rates : In these cases the interest rate is not determined while borrowing/lending, but is dependent on some underlying. The underlying in case of banks is mostly the Base Rate of the bank, which bank can change as per the market conditions. This rate is not arbitrary but based on certain predefined parameters fixed by RBI.
2. Interest to be Charged on What Amount :
(a)Interest Payable on Reducing Balance : Banks normally quote the rate of interest which is charged on reducing Balance mostly. In Reducing balance rate, as the term suggests, means an interest rate that is calculated every month on the outstanding loan amount. In this method, the EMI includes interest payable for the outstanding loan amount for the month in addition to the principal repayment. (b)Flat interest rate : This type of interest charging is usually not applied by public sector banks as this implies an interest rate that is calculated on the full amount of the loan throughout its tenure without considering that monthly EMIs gradually reduce the principal amount. In this type of interest charging, the Effective Interest Rate is noticeably higher than the nominal Flat Rate shown to you on paper at the time of releasing the loan.
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3. Processing fee
This is one time fee that a Bank charges you for a personal loan disbursal. This fee is charged after the loan is disbursed.
This fee is not asked upfront by any Bank. This fee is not to be paid in cash or cheque and is only deducted from the loan amount. Never pay any fee upfront to get a Personal loan disbursed.
4. Insurance Cover for a Loan :
Most Banks want you to buy an Insurance cover when you take a Personal loan. Sometimes their premium is equal to 1-4 % of your loan amount.
These covers are not mandatory and customer can choose to opt out for such Insurance covers on loans if they don’t make a sense for them. You MUST read the fine print of the Insurance cover that a Bank is selling you on the loan and if you don’t require it, stay firm and opt out of that Insurance cover.
5. Prepayment Charges :
You should know that at any point during the tenure of the personal loan, you can opt out of a Personal loan, if you have the funds to return the Bank for the loan taken.
However, banks at times charge 1-5% of the outstanding loan amount when you want to pre pay the loan. So when you take a loan, understand your need and if you wish to prepay – opt for the bank which offers nil prepayment charges or is charging lowest. Now a days, most of the personal loans are on floating rate basis, and in such cases, banks can not charge you pre-payment charges. .
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