Look Beyond EMIs When Comparing Loans
If you have ever searched for a Personal Loan Offer or other forms of credit, or want to set out on the search for the same, one aspect that probably rules your mind is – Interest Rate. So much is this aspect a part of the regular borrower’s mindset that they tend to ignore numerous other elements pertaining to a loan, which may have a significant impact in determining whether the terms of the loan are favourable or not.
As a matter of fact, there have been instances where the loan offer with the lower interest rate, has proven to be costlier to the customer due to one or more of the additional charges such as processing fee, legal fee, valuation fee and prepayment charges amongst others. Hence, before you opt for a loan, make sure you are aware of the following aspects in order to take the best, and the most profitable pick.
Charges levied on the bulk of the loan
While legal fee and valuation charges involve a one-time pre-fixed payment, the pre-payment penalty is collected on the outstanding amount of the credit, and thus varies with the bulk of the loan.
As is evident, fixed charges can be accounted for before you take the loan. On the other hand, variable charges cannot be calculated beforehand, therefore, affect the overall price of the loan in an unexpected and often more expensive way.
For instance, a bank levies a legal fee on loan which falls in the range of 2,000 or above. The fee is most likely to remain the same, whether you apply for 10 Lakhs loan, or 50 Lakhs loan. On the contrary, if the same bank levies a processing fee of say, 1% of the loan amount, then the charges levied for 10 Lakh loan will be 10,000 and that for the 50 Lakhs loan will be 50,000 which is a significant difference, and will directly impact the cost of your loan.
Charges levied on a short-term loan
The impact of additional charges levied on a short-term loan is higher as compared to that on the long-term loans. The reason behind this discrepancy is rather apparent – the charges are spread over a relatively shorter time span in the former situation. Hence, if you are supposed to pay a processing fee of 75,000 on a loan amount of Lakhs, the impact of this charge will naturally be higher in a 5-year loan, as it will account to an additional 1,250 per month, if you divide this amount over the 60 instalments that you will be paying. The same 75,000, when levied on the same loan amount with a tenure of 20 years, will mean an addition of a meagre 312.50 per month over the 240 instalments that you pay. As you can see, the impact is drastically smaller when the same charge is levied on a long-term loan.
Difference in charges
When comparing two different loan offers you may ignore the seemingly small difference in prepayment charges levied by the lender. For instance, considering all other things remain the same, you will probably think that a loan with 10% interest rate and 5% prepayment fee is better than a loan with 10.5% interest and a 0.5% processing fee. However, this may not always be true.
If you are taking a loan of 10 Lakhs for five years, in the first case, you will be required to pay an overall interest of 2.74 Lakhs. In the second case, your interest outgo will be slightly higher at 2.89 Lakhs, which is an increase of 15,000, over the span of five years.
On the other hand, if you wish to prepay your loan on the outstanding loan amount of 5 Lakhs, in the first case, you will be paying 25,000, which in case of the second loan offer would be 5,000. Now here is a difference of 20,000, which you must pay in a single go. Clearly, the difference is stark, and can adversely impact your ability to repay the loan, thereby burdening you with continuing the same for no good reason.
Since most banks do not write down or speak of the processing fee upfront, you may remain oblivious to this apparently small yet significant charge.
We hope that you now have a clear picture in your mind, regarding different charges that may be levied on a Personal Loan, or on any other loans for that matter. More often than not, such charges are not mentioned when the bank offers you the loan, and you may be misguided into believing that an offer with a lower interest rate is better for you.
In order to combat this problem, we encourage you to educate yourself about every aspect of the loan that you wish to take and then consider the overall cost of the loan rather than merely considering the interest. Doing so will ensure that you get a Personal Loan or other credit that is both cost-effective and easier to repay!
To know more about different financial products and charges associated with them, you can speak to the loan experts of MyMoneyMantra to decide which loan offer works best for you.
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