Caution: Personal Loan Terms You Must Understand

A Personal Loan is an invaluable financial instrument in times of emergency, whether for medical treatment, a wedding, educational expenses, or settling other debts. Even though applying for a Personal Loan is quite straightforward nowadays, there are certain Personal Loan terms and conditions that you must be aware of. Ignoring them will only lead to hidden charges and penalties later on.

If you’re one of those applicants worrying about what will happen if you overlook these Personal Loan terms and conditions, this blog will help you understand these terms and conditions, discuss each of them in detail, and also explain their importance.

Key Personal Loan Terms and Conditions You Should Check

Here are some of the most common Personal Loan terms and conditions that you should check when applying for a Personal Loan in India:

1.    Interest Rate: Fixed vs. Floating
One of the most important things you must check is the Personal Loan interest rate. But there's a catch: the type of interest rate is just as important as the agreed interest rate at the time of approval and tenure.

●    Fixed interest rate: The rate is fixed throughout your loan term. Your EMI will not change, so there is a greater level of certainty involved in planning.
●    Floating (variable) interest rate: The rate changes in response to market conditions or the lender's policy. Your EMI will increase or reduce during repayment.

If you're opting for a long tenure, floating rates may look cheaper initially, but could rise significantly later. So, always compare both options before signing the personal loan terms and conditions.

 

2.    Processing Fees and Other Upfront Charges
Most borrowers are only concerned with the rate of interest and completely ignore the Personal Loan processing fees. Processing fees and other upfront charges are one-time expenditures collected by lenders during the distribution of loans to cover administrative, documentation, and service-related expenses.

The processing fees at Poonawalla Fincorp are 3% of the amount borrowed, along with applicable taxes. Some lenders also charge stamp duty and credit report fees apart from these charges.

Tip: Always know the final amount that you get in your bank account after deducting these charges, and check if the lender is charging GST on fees.

 

3.    Prepayment and Foreclosure Rules
Early Personal Loan repayment is always beneficial as it helps to finish off your loan much earlier. However, it's not as simple as you think.
Review the Personal Loan policy and guidelines for:

●    Lock-in period: Prepayment normally is not permitted by most lenders within the first 6–12 months.
●    Prepayment penalty: Repaying the loan before the agreed tenure often results in a penalty. 
At Poonawalla Fincorp, Personal Loan prepayment charges are Nil after the first six EMIs, if paid using own funds. However, in other cases, it can be 4% of the prepaid amount plus taxes.
●    Partial prepayment terms: Certain lenders permit only full settlement and not partial payments.

Tip: If you plan to repay your loan ahead of schedule, opt for a lender with low or no foreclosure fees.

 

4.    Late Payment Penalties
Paying the EMIs late costs you more than you realise. It adversely affects your credit score, and thus, future borrowing becomes difficult. Poonawalla Fincorp charges 24% per annum on the defaulted EMI amount.  Some lenders also charge penalty interest, over and above the regular interest rate, until the dues are cleared.

Tip: Automate EMI payments so that you won't have to pay the penalties.

 

5.    Loan Tenure and Its Hidden Cost
The longer your loan duration, the lower your EMIs will be. However, you'll end up paying a lot more interest in the long run.
For example:
●    ₹5 lakh at 11% for 3 years → EMI ~₹16,374; interest paid ~₹89,000.
●    ₹5 lakh at 11% for 5 years → EMI ~₹10,871; total interest ~₹1,52,000.

Here, you can observe that with the longer loan tenure, the interest amount also increases. 

Tip: Don't just select a tenure based on lower EMI. Consider the overall cost over the life of the loan.

 

6.    Insurance Bundling
Some lenders discreetly add insurance policies (such as loan protection plans) to your loan. While insurance is helpful, it may be added without specifically mentioning that it's optional. 
This makes your Personal Loan repayments a bit more expensive and increases your loan amount and interest, as the premium is added to the principal.

Tip: Check whether insurance is added to your loan. If you are willing to take insurance, compare the lender's policy with standalone policies elsewhere.

 

7.    Credit Score Conditions
Even while approving your loan, lenders may place conditions that enable them to change your interest rate or take other action if your credit score falls sharply.

In rare cases, if your repayment behaviour is very poor or you break major loan terms, the lender may ask you to repay the full outstanding loan amount at once, instead of continuing with EMIs. Therefore, always pay your EMIs regularly once you receive the funds.

Also Read: How To Improve Credit Score In 30 Days in India?

 

8.    Loan Term Modification
Some agreements allow lenders to change certain Personal Loan terms (e.g., interest rate in case of floating loans or certain fees) without your consent. While this is usually within regulatory bounds, it's something you should be aware of.

 

9.    Default Definitions
Most lenders consider defaulting to be "non-payment of EMIs," but some lenders may define it differently. For instance, the following situations may also qualify as a loan default:

●    Furnishing false documents or information when applying for the loan
●    Default on other loans with the lender
●    Breach of loan terms and conditions

Knowing this section of the Personal Loan agreement will protect you from inadvertent breaches.

 

10.    Cooling-off or Free Look Period
Some lenders (primarily online ones) provide a "cooling-off period", which is typically 1–3 days after signing the loan documents, wherein you can cancel your loan application free of charge.

Tip: Don’t delay if you have second thoughts after signing. Once the cooling-off period is over, cancelling the loan will lead to extra costs.

 

11.     Security or Collateral Clauses
While personal loans tend to be unsecured, some lenders may require a security or lien on some assets in exceptional circumstances, which can include a demand for a high loan amount or a lower credit score.

Tip: Know exactly what's being collateralised and under what circumstances the lender has the right to seize it.

 

12.    Tax Implications
Personal Loan interest is not tax-deductible unless the loan is used for specific purposes such as business, education, or home purchase/renovation. In such cases, keep supporting documents handy in case of an income tax inquiry.

Importance of Personal Loan Terms and Conditions

Most people ignore the terms and conditions of a Personal Loan. However, it is very important to read and understand them before signing any loan agreement. This is because even a small change in the clause, like hidden charges or floating interest rates in the terms and conditions of the Personal Loan, will increase your repayment costs. 

Changes in loan terms and conditions will also restrict early repayment through prepayment penalties, add hidden charges or mandatory extras, expose you to legal trouble on default, and harm your credit score if EMIs are delayed.

Hence, it’s important to check the terms and conditions to safeguard yourself from financial trouble! 

Frequently Overlooked Aspects of Personal Loans

Are you wondering what other aspects of a Personal Loan must not be ignored? Here are the points to look out for that will help you avoid costly blunders in the future. 

1.    Interest Rates Quoted Monthly Rather Than Yearly Basis
Some lenders offer "only 1% interest rate" but fail to mention that it's per month and not annually. So, if you calculate it, it comes to 12% per annum, often excluding fees and other charges. Always compare monthly rates to an Annual Percentage Rate (APR) for accurate comparison.

Investopedia's 2023 Personal Loan Borrower Survey says, nearly 78% of debtors rated APR as the most important criterion when evaluating loans.

2.    Vague Terms Such as "Fees as Applicable"
Some lenders mention "fees as applicable." This gives them the liberty to charge additional fees later without necessarily having to inform you beforehand. Hence, you should always get a detailed breakdown of the fees before signing.

3.    Mandatory Cross-selling
If a lender forces you to purchase insurance, credit cards, or investment products as a condition for approving the loan, it is mandatory cross-selling. While some add-ons will offer value, they should always remain optional, not compulsory.

To Conclude

A Personal Loan is a convenient way of obtaining funds in case of emergencies. However, if you do not carefully review the Personal Loan terms and personal loan rules and regulations, then you’ll be very likely to incur losses and pay penalties later on. 

There are a lot of hidden terms and conditions in Personal Loan clauses that you should pay attention to. If you want to make the most out of your loan, take a few minutes to read the loan agreement and then proceed with the loan application. 

Are you looking to get a personal loan at nominal interest rates and zero hidden charges? If yes, then apply for a Personal Loan with Poonawalla Fincorp today!

FAQs

1.    Why does my loan agreement mention both "flat rate" and "APR"?
Flat rate is the interest calculated on the original loan amount, while APR (Annual Percentage Rate) shows the actual yearly cost of borrowing, including fees and other charges.

2.    Can my lender change the EMI amount during the loan tenure?
Yes, if you have a floating rate loan and interest rates change, or if your repayment schedule is restructured.

3.     Is it legal for my lender to charge a prepayment penalty?
Yes, for fixed-rate loans, however, the RBI has barred such charges on floating-rate loans for individuals.

4.    Why does my loan agreement mention a "penal interest rate" separately from the main rate?
Penal interest is an extra charge applied only if you miss payments or default, which is considered separate from your regular interest rate.

5.    Can I get a copy of my Personal Loan terms and conditions before approval?
Yes, you can ask for a draft agreement or the MITC document before finalising your decision, as it's your right as a borrower.