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Personal loans provide fast cash, but high fees and interest can add up. Experts advise careful planning and avoiding multiple loans to prevent debt traps
Avoid multiple loans to prevent falling into debt traps. (Representative/Shutterstock)
Personal loans are often seen as the quickest way to tackle sudden financial needs. But what looks like an easy solution at first glance can turn out to be a costly affair if borrowers ignore the fine print. Experts warn that a handful of common mistakes can make a personal loan far more expensive than anticipated.
Every personal loan comes with a processing fee, typically ranging between 0.5% and 3% of the loan amount. This fee is deducted upfront, reducing the actual disbursal. Additional costs such as late payment penalties, prepayment charges, and stamp duty can push the total burden even higher. Financial planners say these charges must be calculated in advance, otherwise “the cost of the loan becomes much more than the interest rate”.
Interest rates on personal loans vary widely, from 10.90% to as high as 24%, depending on the borrower’s credit score. A rate hike often leads to higher EMIs. To cope, borrowers tend to extend the repayment tenure, but this increases the overall interest outgo. “You pay more money in the long term,” experts caution, adding that stretching repayments for short-term relief is rarely a good strategy.
Borrowers who take several personal loans at once or borrow beyond their repayment capacity risk falling into a debt trap. Missed EMIs not only attract heavy penalties but also damage credit scores. Once the credit profile weakens, future loans become more expensive, worsening financial stress.
To keep EMIs small, many opt for longer loan tenures. While this makes monthly payments manageable, it significantly increases the total interest paid over the loan’s life. Financial advisors recommend balancing affordability with repayment speed. “In a short tenure, the EMI is higher, but the total interest has to be paid less,” experts point out.
Borrowers also lose money by not adopting smart repayment methods. Strategies such as part-prepayment, early repayment, or refinancing at lower rates can reduce costs substantially. Ignoring these options means paying much more over time.
Analysts suggest that before signing, borrowers should carefully check all fees, use EMI calculators to test affordability, and avoid taking multiple loans. A shorter tenure, coupled with a clear repayment strategy, can keep personal loans from becoming a financial burden. As experts put it, “Personal loans are beneficial only if you take them wisely.”
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