Think Your Loan EMI Is Cheap? Here Are 5 Hidden Rules That Can Spike Costs | Banking and Finance News

The interest rate is only part of the overall cost. (AI Generated/News18 Hindi)

When considering a personal loan, the focus often remains on the interest rate and EMI (Equated Monthly Instalment). However, numerous hidden clauses in loan agreements can lead to unforeseen expenses.

Knowing these details beforehand can help avoid falling into a debt trap. Here are five crucial rules for loan takers to keep in mind:

1. True Interest Rate Or APR (Annual Percentage Rate)

The interest rate is only part of the overall cost. Banks and NBFCs (Non-Banking Financial Companies) typically highlight the interest rate alone, but the APR gives a clearer picture as it includes processing charges, service fees, and other hidden costs. The APR reveals the actual annual cost of the loan.

2. Late Payment Or Default Penalty

Delaying an EMI not only incurs fines but can also result in an increased interest rate. Frequently, after one or two missed EMIs, penalties escalate, making the loan more expensive. It is essential to thoroughly understand all clauses related to defaults.

3. Loan Tenure And Total Payment

Banks sometimes extend the loan tenure to present a lower EMI. While this reduces the monthly instalment, it significantly increases the total interest. For instance, repaying the loan over six years instead of three can double the interest paid. It is vital to calculate both the EMI and total payment in advance.

4. Default Situations And Recovery Methods

Loan agreements specify what constitutes a “default” and the actions a bank can take, including court cases, recovery of guaranteed property, and impact on one’s credit report. These terms should not be taken lightly, as they can heavily impact one’s financial standing.

5. Right To Complaint And Resolution

In case of any rule violations by the bank or NBFC, borrowers have the right to file a complaint. The loan agreement must mention the procedure for filing complaints, whether with the banking ombudsman, regulatory authority, or consumer court.