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A personal loan can be a useful financial tool, but only if you handle it responsibly, know the full cost, assess the need and compare each offer carefully to avoid any further hassles.
New Delhi. As easy as taking a personal loan may seem, it can be equally difficult to understand its real cost. Many people choose a loan just by looking at the interest rate, but the truth is that the interest rate itself does not tell the whole story. For example, if you borrow Rs 5 lakh at 11% interest for 3 years, then you will have to pay around Rs 89,296 only in interest. But if the interest rate increases by just 2 percent to 13 percent, then the total interest becomes Rs 1,06,491 i.e. additional expenditure of Rs 17,195 due to just a small rate increase.
The loan cost also depends on your credit profile. Customers with good salary, stable job and strong credit score get less interest. At the same time, if you choose a longer tenure to reduce the EMI, then the monthly installment will reduce but the total interest will increase significantly i.e. relief now, but more loss in the long term.
Hidden charges can be heavy on your pocket
Hidden charges also weigh heavily on your pocket. Processing fees usually range from 1–3 percent of the loan amount. Apart from this, pre-payment penalties, part-payment charges and late fees can make the loan very expensive. Often people do not pay attention to these expenses and take the decision just by looking at the interest rate.
APR includes many charges along with interest
Before taking a loan, look not only at the interest rate but also the Annual Percentage Rate (APR). This includes interest along with processing and other charges. Also check with the EMI calculator whether the monthly installment will comfortably fit in your budget or not. Also see whether pre-payment facility is available or not and how much is charged for it.
