Before taking a Personal Loan, you should always ask one question before any other: “what exactly is the actual cost of a Personal Loan?” When you go for a Personal Loan, or any loan for that matter, financial institutions usually impose certain fees, such as interest rates, processing fees, etc. Most overeager borrowers only consider the interest rates but should also consider other extra charges before devising a repayment plan.
How to Make Personal Loan Payments
People want to buy houses, luxury cars, and so on, but not everyone is fortunate enough to have the funds to do so. Instead, they opt for a loan. For example, you use a loan to purchase a home, vehicle, or other expensive items.
Before applying for a loan, consider these charges to understand the real cost of a Personal Loan.
When obtaining loan quotes, the first point of concern is the rate of interest. The interest rate typically ranges between 14.99% and 24.99%, depending on your eligibility and creditworthiness. Essentially, the corpus of interest on a Personal Loan can equal almost 10% of the total loan amount.
The processing fee is subject to a maximum of 2% of the loan amount, which is the administrative cost of processing the loan application. It is non-refundable, which means you will not get the processing fee for Personal Loan back even if the financial partner rejects your application.
Prepayment or Foreclosure Charges
If you are willing to close your Personal Loan account (in full) before the term ends, the lending institution will impose prepayment or foreclosure charges against the outstanding loan amount. Most financial partners, however, have a 6- to 12-month lock-in period.
If you wish to cancel your loan application post disbursal, the financial partner will charge a loan cancellation fee, which varies based on your preferred lending institution. So, it will be best to be certain before applying for a loan.
Many financial partners allow you to switch between the available repayment options, so a fee is charged for this.
EMI Bounce Charges
Lending institutions send alerts to ensure sufficient funds are available in your accounts before the EMI due date. The lending institution will charge a penalty if you don’t have the minimum balance to proceed with the EMI payment.
As a result, conduct thorough check-ins before making a final decision. The following is the formula for calculating Total Loan Cost:
(L * R * (1+R)n*F) / ((1+R)n*F-1)
- L denotes the loan amount.
- R is the annual interest rate.
- N is the number of repayment periods required for the loan.
- F is the frequency of your interest rate.
Instead of manual calculations, use an online Personal Loan calculator to know the total cost of the loan, which is the total amount paid versus the total amount borrowed, with the difference being interest payment.
Before you take a Personal Loan, you should understand how much the monthly payments will actually cost you and whether your budget can comfortably accommodate the additional expense.
You are not simply repaying the principal when you borrow money from a financial partner. Interest, the cost of borrowing money, will all be included in the monthly instalments. Additional fees may be associated with the loan, like processing fees for a Personal Loan.
Use an online total loan cost calculator before submitting your loan application to help you understand what your payments might be. This calculator applies to all loans with a fixed interest rate, such as home loans, student loans, car loans, education loans, etc. This calculator will compute the instalment amount and the total loan cost by multiplying the instalment amount by the years and frequency of payment.
Remember that strategies such as not borrowing more than you need and paying off your loan early can help you save money on payments over time.