Are you fully aware of the charges associated with your personal loan?

By axio Content Team
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Hello and welcome back to our Know Your Lender knowledge series that aims at providing you with important financial information to equip you with making better decisions when it comes to credit.

In this part of the Know Your Lender series, Shyam Vijay P. from our Operations Team writes about a few important things you should keep in mind before availing a personal loan.

Ever wondered why financial institutions often disburse loan amounts lower than what's indicated in the sanction letter?

When seeking a loan to meet your financial needs, you naturally would want to go for the best deal offered. However, you should know that financial institutions incorporate various charges to cover administrative costs, risks, acquisition efforts, and service throughout the journey. Here are some components that may be included in your loan:

  • Application Fee: This is a nominal fee that covers underwriting costs, commonly seen in secured loans such as home loans, mortgage loans, etc.

  • Processing Fee: This fee covers administrative costs, mentioned in the sanction letter.

  • Documentation/Stamping Charges: These charges are collected for finalising the deal and covering stamp duty paid to the government and other agencies involved.

  • Insurance Fees: Although not mandatory, it is better to have one.

  • Loan Preclosure Charges: These charges are applicable on the pre-closure of a loan, excluding the cool-off period.

  • EMI Dishonour / Bounce Charges: These charges are applicable if you miss an EMI payment. It is strongly advised to avoid missing any payments, as these charges are significant. Moreover, delayed payments can adversely affect your credit score and may impact your ability to secure loans in the future.

  • Part Pre-Payment Charges: Applicable when you make a part pre-payment (up to 20% of principal outstanding amount) on a loan.

  • Swap Charges: Charged when you change the mode of payment/instrument of payment / date of payment.

  • Record Request Charges: Applicable when you ask for copies of records of transactions.

Regulatory Body's Opinion on Charges

The Reserve Bank of India mandates financial institutions to disclose all charges to customers beforehand, as per its circular dated November 25, 2008, Guidelines on Fair Practices Code for Lenders.

Where to find mention of these charges:

The Most Important Terms and Conditions ("MITC") document, mandated by the regulator, furnishes all charges incurred during loan disbursement and afterwards, including cheque/SI bounce charges, part payment charges, late payment penalty, etc.

Precautions

Loans, like other financial commitments, have their advantages and disadvantages. It's prudent to take preventive measures to avoid undesirable outcomes rather than addressing them after the damage has occurred. Here are some precautions to keep in mind when procuring loans:

  • Never transfer money to individuals promising loan influence or sanction.
  • No bank/NBFC allows individuals to collect charges/fees mentioned in the MITC.
  • Cash payments for charges are not accepted.
  • Verify the representative's credentials thoroughly.
  • Negotiate charges to potentially save costs.
  • Trust only financial institutions registered under RBI to avoid dubious companies.
  • Nothing is mandatory until you agree to the terms.

Grievances

If charged without disclosure, escalate the issue to the financial institution's grievance redressal team or to the banking ombudsman nominated by RBI. As a last resort, consider arbitration in a court of law.

In today’s world it is relatively easier to avail a loan than it used to be in the past, however in a digital world it pays to be cautious about borrowing money from lending institutions. We hope these nuggets of information serve you well.

Stay tuned for the next Know Your Lender update.