The Reserve Bank of India (RBI) has issued a cautionary note to both banks and non-banking financial companies (NBFCs) regarding the surge in personal loan disbursals. RBI Governor Shaktikanta Das, during the recent monetary policy committee (MPC) meeting on October 6, 2023, emphasized the importance of stringent due diligence when disbursing personal loans. Consequently, obtaining personal loans may become more challenging for borrowers. If you are considering a personal loan to finance your expenses, here are three crucial factors to keep in mind, in addition to the interest rate and your credit rating.

  1. Fees and Charges: Lenders typically impose a processing fee on loans, which varies among lenders. For instance, ICICI Bank levies a 3% fee along with applicable taxes, while Axis Bank's charges range from 0.5% to 2.5%. Kotak Mahindra Bank imposes approximately 3% in addition to Goods and Services Tax (GST). State Bank of India (SBI) charges a processing fee of 1% of the loan amount, with a minimum of Rs 1,000 and GST, and a maximum of Rs 10,000 and GST. HDFC Bank's processing fee goes up to Rs 4,999 plus taxes. Apart from processing charges, banks may also impose other fees, such as stamp duty charges, EMI dishonor charges (in case of missed payments), and collection charges (if the bank needs to visit you for EMI collection). Stamp duty charges are typically based on the applicable rate, while other charges usually fall in the range of Rs 200-500 along with applicable taxes. Some banks also apply a penalty for missed EMIs, in the form of interest on the overdue installment. Axis Bank, for instance, charges a penal interest of 24% per annum, which equals 2% per month on the overdue installment. SBI, on the other hand, doesn't levy penal interest for loans up to Rs 25,000. However, for amounts exceeding that threshold, if the irregularity persists for over a month, the bank will impose a penal interest of 2% per annum, in addition to the applicable interest rate, on the overdue amount during the default period. There may also be a loan cancellation charge should you decide to cancel your loan after paying the first EMI. For example, ICICI Bank charges a flat fee of Rs 3,000 plus taxes as a loan cancellation charge. Finally, if you opt to prepay your loan, you may incur a foreclosure charge, which could range from 2-5%, along with GST on the outstanding principal. It's advisable to compare all these charges before applying for a loan.
  2. Offers and Gimmicks: Lenders may tempt you with offers of future top-up loans at lower interest rates or similar incentives. However, exercise caution when considering such offers. If you do not require a top-up loan, it's best to avoid it. Additionally, be wary of loans based on floating interest rates, which may initially appear lower than fixed rates but could become costlier if interest rates rise. Always carefully review the terms and conditions before proceeding with the loan.
  3. Repayment Ability: While obtaining a loan is relatively straightforward, it's essential to remember that you will ultimately be responsible for repaying it. If you take out a substantial loan and default due to unforeseen circumstances, it can have severe consequences. Defaulting can negatively impact your credit rating and even lead to legal repercussions. In such cases, you may be subject to fines, penalties, and potential legal action for loan default. Therefore, it's crucial to assess your repayment capacity realistically before applying for a personal loan.

In summary, these three considerations - fees and charges, loan offers, and repayment ability - should be thoroughly understood and evaluated before pursuing a personal loan to ensure a financially sound decision.