The Fine Print to Read When Availing a Personal Loan

Personal loans are indeed a lifeline, but these are high-cost loans, and their allure can swiftly transform into a trap if approached carelessly. When you opt for a personal loan, it is important to diligently scrutinise the fine print. Often overlooked in the haste of urgency, the terms and conditions hold the key to the true cost and implications of borrowing.

This article elucidates the intricacies of personal loans, shedding light on the often-ignored fine print that can dictate your financial fate. From interest rates to repayment schedules, understanding the nuances of a personal loan agreement is paramount to safeguarding your financial well-being.

Before we delve into the personal loan fine print, it's vital to understand the importance of assessing your financial needs and conducting thorough research. Approaching a personal loan requires careful consideration and acknowledging it as a commitment with repayment responsibilities. It is advisable to reserve loan applications for genuine and essential purposes to avoid unnecessary debt. Evaluate your financial situation meticulously to ensure that the loan addresses critical or emergency needs.

Taking out loans for unnecessary reasons can strain your finances and increase your liabilities. Therefore, it's crucial to evaluate your needs and repayment ability before applying for a personal loan. Furthermore, it's wise to maintain a debt-to-income ratio below 30% to maintain a good credit score.

By exercising caution and limiting loan applications to essential needs, you can manage your finances better and handle potential repayment difficulties more effectively. This fosters a responsible and sustainable borrowing approach.

Conducting thorough research before borrowing is crucial for making informed decisions. Resist the urge to accept the first loan offer; instead, explore various lenders to find the most favourable terms. By diligently comparing options, you increase the chances of finding a lender offering lower interest rates and better terms.

Furthermore, ensure that the chosen loan meets your specific requirements, avoiding future complications. Understanding the available options empowers you to secure a personal loan that fulfils your financial needs and offers favourable terms and conditions.

What Is Personal Loan Fine Print?

A fine print of a personal loan, also referred to as a personal loan agreement, includes the terms & conditions, disclosures, and other essential details typically not highlighted in the main document but provided as supplementary information in footnotes. It's imperative to read this section thoroughly before finalising any agreement, as it often contains critical information that the issuer might prefer to keep discreet.

Neglecting to review the fine print in a loan agreement can lead to costly mistakes such as unfavourable terms or hidden fees, significantly impacting your financial situation.

A personal loan agreement serves as the cornerstone of the borrower-lender relationship, outlining key details such as the loan type, repayment terms, and obligations of both parties. Signatures from both parties signify mutual acceptance of the terms & conditions and hold each party accountable for their respective roles and responsibilities.

Once signed, the loan agreement transforms into a legally binding document, obligating the lender to disburse the specified loan amount and the borrower to repay it as per the agreed-upon terms.

If you are new to the intricacies of loan agreements, understanding its components is essential. A comprehensive loan agreement typically includes details such as the lender's name, borrower information, loan amount, interest rate, repayment terms, and information about collateral. Additionally, it may outline events of default and associated consequences, providing a clear roadmap for navigating potential challenges.

Navigating the fine print of a loan agreement can be daunting for individuals with limited financial knowledge. Here are some important checks you should do when reading the personal loan fine print.

[Also Read: 9 Most Important Questions to Ask Before Applying for a Personal Loan]

What to Check in Your Personal Loan Fine Print?

Once you've applied for an offline or online personal loan, the lender will furnish you with a loan agreement. Before giving your approval, ensure you've addressed the following inquiries and thoroughly reviewed the document.

1. What is the interest rate?

Ensure that your loan agreement specifies the actual annual percentage rate (APR) you will be charged. Whether the interest rate is fixed or variable will impact your monthly payments. Variable rates may start lower but could increase over time, which can complicate your budget later.

Fixed interest rates, on the other hand, remain constant throughout the loan duration, ensuring consistent payment amounts. You can check how the interest rate affects the loan cost by utilising a Personal Loan Calculator.

Take note that while most lenders in India offer personal loans at a fixed interest rate, it is best to confirm the type of interest rate and APR in the fine print.

2. What is the repayment period?

Determine the exact number of months or years allotted for repaying the debt. The lender should furnish you with the anticipated monthly payment and the loan tenure.

Remember, higher loan tenure may reduce your EMI amount but your total interest outgo increases. Hence, before choosing the personal loan tenure, it is advisable to play around with the Personal Loan EMI Calculator to choose the suitable loan tenure as per your budget.

3. Are there any applicable fees?

Most lenders levy processing fees on personal loans. While some lenders may charge a flat processing fee, others may charge it as a certain percentage of your loan amount. This fee is typically deducted from your loan amount at the time of disbursement or included in your first EMI.

You should conduct research to find out typical fees and their amounts for your desired loan to ensure fair charges. Additionally, inquire about potential late payment fees, prepayment charges, or other incurred costs.

4. Is collateral necessary for the loan?

While personal loans are unsecured and do not need collateral like secured loans, such as those for car loans and home loans, in certain cases the lender may ask for collateral. This is typically when the applicant does not qualify for the desired amount or senior citizens who exceed the age criteria.

However, take note that not all lenders offer personal loans against collateral and if you do not meet the eligibility criteria, your personal loan application may straightaway get rejected.

5. Is there a provision to reset fixed interest rates?

In recent times, banks have implemented a reset provision for fixed interest rates. This provision grants the banks the power to raise the interest rate if market rates surge in the future. This poses a significant drawback for borrowers who opt for fixed rates to ensure consistent monthly EMI amounts without being affected by market fluctuations. Hence, you should check if your lender has a provision to reset fixed interest rates.

[Also Read: 11 Best Personal Loan Tips You Must Follow]

Watch Out for These Warning Signs in Your Loan Agreement:

• An Unusually Low APR: Inquire about the reasons behind a significantly lower rate compared to other lenders.

• Undisclosed terms and conditions: If the lender/lender's representative asks for something not mentioned in the fine print, it's a red flag. You should pay close attention to any undisclosed terms in your loan documents. Seek clarification on any unclear terms or conditions.

• High Prepayment Charges: Many lenders impose prepayment charges on personal loans. Since personal loans are high-cost loans, many borrowers prefer to clear them as soon as possible. Hence, you should consider exploring alternative options if your loan has high prepayment charges.

To conclude:

While personal loans can serve as valuable financial tools during times of need, overlooking the fine print and failing to assess one's financial capabilities can lead to unforeseen pitfalls. By thoroughly understanding the terms and conditions, evaluating repayment obligations, and considering alternatives, borrowers can safeguard themselves against unnecessary debt and financial strain.

To steer clear of unreliable loans, establishing a solid credit history is paramount, as lenders often offer more favourable loan terms and interest rates to individuals with good credit records. If your credit score is less than ideal, obtaining loans with favourable terms, rates, and fees might pose a challenge. Enhancing your credit score can significantly enhance your eligibility for better loan opportunities.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

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This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.