When we take loan, it is understood that we need to pay interest. This interest is the cost of money borrowed which we account for as an expense and most important we are prepared for incurring these charges. However, we also find few other charges, when we talk to our Relationship Manager and find few more in the loan statement, which we receive after a year. As per bank, these are normal charges, but for us these are expense which we have not agreed. In other cases, we also get know about certain type of penalties for certain actions performed by us. To avoid such surprises, we should study bank terms carefully and then only accept the loan. Let us see different type of charges and penalties levied by banks and financial institutions.
Processing fee
This is the fee which a bank charge for processing your loan. The processing, in case of home loan or Loan against property, includes your credit check, valuation of property or other collaterals and documentation cost. These cost varies from a fixed amount of Rs.5000 to as high as 1% of the loan amount. The processing charges it is a factor of loan amount, collateral quality and documentation requirements by any financial institutions. Do not forget to negotiate on these charges as banks may reduce these charges for the sake for creating their healthy loan book.
In case of auto loans, these are generally fixed at Rs.2000 to Rs.5000, as such with very scope of bargain. However, in case of education loan, it varies with your destination of study. While most banks are charging negligible amount for higher education in India, but for studies abroad, these charges could be in the range of 0.5% to 1% of the loan amount. Processing charges are maximum in case of personal loan where it varies between 1% to 2%. Here the negotiation also does not work in your favour being the small amount of loan.
Not to mention, that all these charges also attract service tax, surcharge and education cess as applicable.
Prepayment Penalty
It may look surprise to you but banks charge to penalty for paying early also. In case of home loan, prepayment penalty is scrapped by the regulator Reserve Bank of India. In other cases if you are planning to close your account early, you should confirm the same with your bank. The prepayment charges could be in the range of 1% to 2.5% of the loan amount. Generally Banks do not charge prepayment penalty for part prepayment, and only foreclosure is covered. In few cases, it is also seen that it is applicable only for initial few years post which it stand as zero. It is always advisable to understand this very clearly as your option to close loan or shift to another bank at later stage depends on this.
Additional interest or Annual charges on OD facility
Now a days, loan like Loan against property or Home loan are also structured in form of Over draft facility. This gives you a comfort of taking money as per your requirement and refunding as and when you wish. Thus effectively you pay interest only on the overdraft balance. Where banks are providing such facility, they are also charging higher interest rate in the range of 0.25% p.a. to 0.50%p.a. While some banks or NBFCs are also charging a fixed charge between 0.5% to 1% per annum for just giving this facility. So when you are willing to avail such facility, it is important to consider these annual charges and higher rate of interest as well.
Penalties on EMIs Defaults
Banks expect you to pay your EMIs on time and regularly. Any default in EMIs not only brings a bad credit record for you but may also bring in penalties. Certain Banks/NBFCs has the policy of penalty in the form of higher interest rate or fixed charges for every EMI default. Such charges are stated as an fine print in your agreement and needs to be clarified upfront.
Having understood these charges, we should be very careful while selecting our lender, Transparency is always a better choice when compared with a lesser transparent good deal. The choice of Bank or NBFC will stand far better than opting for taking loan from an individual. Also within Banks, it is always better to compare not only in terms of interest rates but also other charges and penalties.
