What are the hidden charges of a loan?

While taking a loan, most people worry about the charges they might have to pay once the loan is approved. But the monthly EMIs people need to pay for a loan sometimes include more than the regular principal and interest charged. Instead, if you see the invoice generated every month, you will see several underlying charges. Being unaware of these can put you in a tough spot because, most months, you will pay much more than necessary.

Therefore, before you take out any loan, you should know about the possible charges you may have to pay in the disguise of available charges. This will further help you to avoid unnecessary payments and scams. In this article, we will walk you through the hidden costs of a loan to ensure you are properly aware of what needs to be done when you are charged with these deductions and how to avoid them. 

Hidden charges you should know for a loan

Although the exact hidden charges of a loan will vary from one type to another, we have discussed some of the most common ones that are similar to almost all credit types. This discussion will help you to understand how you are illegally getting charged for something you are not entitled to know. 

Processing and GST fee

You should be aware that the first and foremost hidden charge is the GST and processing fees. Usually, loans are subjected to GST, provided it is taken for business purposes, or the person borrowing the credit has income proof through businesses. However, GST is not applicable for salaried people because the loan itself will help them avail of tax exemption according to Section 80C.

Also, there should be no processing fee from the creditor’s side. Therefore, you should ask for the total breakdown of the monthly charges you need to pay. This will help you understand whether the creditor is charging any processing and GST fees. 

Foreclosure charges

People often like to foreclose their loans when they cannot repay the loan EMIs anymore. Foreclosure is a kind of loan settlement when you can provide proof that you can pay half the total debt and request the concerned creditor to foreclose the loan. Another way you can foreclose the loan is by giving evidence of disability and inability to pay due to the loss of an income source unexpectedly without prior notice. 

Foreclosure charges are often applied on loans as compensation for the loss the creditor will suffer when the loan is settled much before the total repayment tenure. One needs to be sure of the foreclosure of the loan and proceed further after having a detailed discussion with the creditor about any hidden charges. You will meet some creditors who don’t charge anything on the foreclosure of the loan. 

Annual interest 

One of the essential things people usually need to learn about loans is that some loan types have fixed annual interest (home loans) while others can have flexible rates (personal loans). For the latter type, the interest charged will reduce each year based on the total debt outstanding and the payment term. If the payment term is more, but you have brought down the outstanding debt to half by paying more as EMI every month, you should be charged less.

However, sometimes, you will find the creditors charging you the same even when the interest rate needs to be reduced according to the Flexi pay terms. As a result, you will continue to pay the interest for the rest of the repayment terms, even if you are not meant to. So, you should be aware of this hidden charge that will help you avoid making the payments unnecessary. 

Late payment interest charges

Another hidden charge you might get charged is the late payment interest rate. Although it is the right of every creditor to charge you additionally for late payment of the interest or the monthly dues, there is a specific deadline for doing so. It means that most creditors offer a grace period of 10 days after the last due date for you to make the payment.

If you pay the monthly installment within ten days of the grace period, you shouldn’t get charged for late payment. These ten days are a different timeline, allowing the borrower to make the payment without hassle. You will get charged with the late payment interest rate only when you pay the amount after the ten-day of grace period from the last due date. If the creditor continues to charge for the late payment interest rate within the grace period, it will be set illegally. 

Prepayment penalties

Even if the creditor charges you for foreclosure, the action can be justifiable because loan settlement means having it closed much before the payment term and without you paying the full. But that will be done illegally when you get charged for prepaying the loan. Prepayment of the loan means you are paying the entire principal due much before the term’s end date. 

When you prepay the loan, you pay the principal amount and the interest charged to date. Suppose the creditor chooses to deduct any further charge for prepayment. In that case, that will be done illegally because you won’t be entitled to pay extra for paying the loan amount in complete earlier before the concerned payment term. 

Ways to avoid the hidden charges of a loan

Since you may get uncharged illegally for the hidden charges, you should know about specific ways to avoid that. For instance, you should ask your creditor about any costs and processing fees that weren’t mentioned in the initial contract. Another thing you need to understand is that the loan amount you prepay or foreclose shouldn’t be charged with an extra penalty, regardless of anything else.

Conclusion 

Taking out a loan is the right of every person. But it would help if you learned more about the hidden charges of loans that will help reduce the amount you are being charged on taking any action. Besides, you can also set a lawsuit against the creditor if they charged you for something you aren’t entitled to. If you want to know further, you can connect with the experts at Piramal Finance.