Many borrowers opt to close their loans before the tenure ends to save on interest payments. However, banks often impose foreclosure or prepayment charges as a way to compensate for the lost interest income. These charges typically range between 2% to 5% of the outstanding loan amount. While some banks waive these fees if the prepayment is made after a certain period (e.g., after 12 months of EMI payments), others strictly enforce them. Borrowers should carefully check the foreclosure terms in their loan agreement before making early repayments.
Additionally, some banks set a lock-in period (usually 6 to 12 months), during which foreclosure or partial prepayment is not allowed. Any attempt to close the loan within this period may attract a hefty penalty. Those considering early repayment should compare these charges with the total interest savings to determine if it is financially beneficial.
Partial prepayments help reduce the principal amount, which in turn lowers the overall interest burden. While some banks allow partial payments without extra costs, many impose a fee ranging from 1% to 3% of the prepaid amount. Moreover, certain banks restrict the frequency and amount of partial payments. For example, some lenders allow a borrower to make partial prepayments only once or twice a year, while others require that a minimum percentage of the loan amount (e.g., 10%) be repaid in a single transaction.
Borrowers planning to make periodic lump sum payments should clarify the bank’s policies regarding partial prepayment charges before taking a loan.
When borrowers face financial difficulties and struggle to make EMI payments, they may request a loan restructuring. This process involves modifying the repayment terms, such as extending the tenure, reducing the EMI amount, or changing the interest rate. However, restructuring comes at a cost. Banks typically charge 0.5% to 2% of the outstanding loan amount for approving such modifications.
Loan restructuring may also have an impact on the borrower’s credit score. Since restructuring is often seen as a sign of financial distress, credit bureaus may classify it under "settled" or "restructured" loans, which can lower the borrower's creditworthiness for future loans.
If a borrower defaults on EMI payments for an extended period, banks initiate legal proceedings or hire recovery agents to recover the dues. The legal expenses incurred in such cases, including lawyer fees, court costs, and notices, are often passed on to the borrower. These charges can vary widely depending on the complexity of the recovery process.
In severe cases of non-repayment, banks may seize assets or initiate arbitration proceedings, further increasing the financial burden on the borrower. To avoid such situations, it is advisable to communicate with the bank and seek alternative repayment options if facing financial difficulties.
Some banks provide borrowers the option to switch from a fixed interest rate to a floating rate (or vice versa), depending on market conditions and loan tenure. However, this comes at a price. The conversion fee typically ranges between 0.5% to 2% of the outstanding loan amount.
For example, if interest rates in the market decrease significantly, a borrower on a fixed-rate loan may want to switch to a floating rate to take advantage of lower EMIs. However, the cost of conversion should be weighed against the potential interest savings before making the switch.
Banks charge processing fees for administrative costs associated with loan approval and disbursement. This fee is usually 1% to 3% of the loan amount and is deducted before the loan is disbursed. Additionally, banks impose an 18% Goods and Services Tax (GST) on all service charges, including processing fees, loan restructuring, foreclosure, and penalty charges. This means that the effective cost of taking a loan is higher than what most borrowers anticipate.
HIDDEN COSTS TO WATCH OUT FOR:
Besides the direct charges, borrowers should also be aware of additional hidden costs, including:
- Insurance Charges: Some banks require borrowers to purchase loan protection insurance, which adds to the overall cost.
- Statement and Documentation Fees: Fees for duplicate statements, loan account statements, and NOC (No Objection Certificate) can range between Rs 200 to Rs 1,000 per request.
- Balance Transfer Charges: If a borrower transfers the loan to another bank for a lower interest rate, the existing bank may charge a balance transfer fee of 1% to 3% of the outstanding amount.
While personal loans offer quick financial relief, borrowers must be vigilant about hidden charges that could significantly increase the actual cost of the loan. Understanding these fees and reading the fine print before signing the loan agreement can prevent unpleasant surprises later.
To minimize costs, borrowers should:
✔ Compare processing fees and hidden charges across different lenders before finalizing a loan.
✔ Ensure timely EMI payments to avoid penalties and negative credit score impact.
✔ Choose a bank that offers low or zero foreclosure and partial payment charges if they plan to repay early.
✔ Clarify all charges with the lender and negotiate fees wherever possible.
Taking a personal loan is a long-term financial commitment, and making an informed decision can help borrowers avoid unnecessary financial strain in the future.
