Is Your Personal Loan Costing You More Than You Think?

In the last decade, personal loans have surged enormously. In India, personal loans grew by 25.2% on year-on-year basis in FY 2024 according to CRIF High Mark's lending report driven by digital lending platforms, easy access to loans and rising customer demand.

Remember that the convenience of quick money often hides deeper costs such as fees, interest rates and long-term financial strain. If you have taken out a personal loan, it might be worth asking, Is it costing you more than you think?

Real Cost of Borrowing

When most borrowers look at a personal loan, they focus on the interest rate. But that is just the opening and there is more behind it in reality.

Hidden Charges That Are Ignored But Actually Added Up

• Processing Fees: Commonly 1–3% of the loan amount
• Prepayment Penalty: Is charged if you repay the loan before tenure ends
• Late Payment Fees: Can go up to Rs.1,000 or more per month
• Insurance Charges: Sometimes bundled with loan offers

These fees, combined with high interest rates (which may range from 10–24% annually) greatly increase the real cost of borrowing.

Cost Comparison

Outlined below is a comparison of how two loans can appear similar but end up costing differently:

Even a small increase in the interest rate plus a few extra charges could mean paying Rs.35,000 more over the same period.

You may also like "Buy Now Pay Later Converting into Personal Loans"

"Easy EMI" Illusion

Many lenders advertise loans as "just Rs.999/month". This marketing strategy hides the fact that a longer tenure results in higher overall repayment. Borrowers tend to over-focus on the monthly commitment rather than total cost. It is just a marketing trick and it works.

EMI Illusion Example:

Rahul takes a Rs.19,999 loan for a new smartphone. He opts for a 24-month EMI of Rs.999/month interest. His monthly EMI is budget-friendly but he ends up repaying over Rs.23,900. Total cost = Rs.999 × 24 = Rs.23,976, but the actual phone price may be Rs.19,999. The remaining Rs.3,977 is interest he didn't notice because there was no upfront 'interest rate' shown. If you add up personal loan hidden costs like processing fees, GST and mandatory insurance then he would be paying more than Rs.25,000. You should try to escape such Easy EMI trap.

Long-Term Impact on Your Finances

The consequences of not understanding loan terms extend beyond repayment:

• Credit Score Damage: Missed EMIs lower your credit score and also make future loans more expensive i.e. at higher personal loan interest rate.
• Debt Trap Risk: Taking multiple loans may lead to a cycle of refinancing.
• Savings Depletion: Repaying loans with penalties erodes emergency funds and long-term savings.

Smart Ways to Lower Your Loan Costs

If you are already committed to repaying loans or considering a new loan, here are some important steps:

Compare Interest Rates Across Lenders

You must compare the Interest Rates Across Lenders so that you can negotiate the rates.

Opt for Shorter Tenures

This may mean higher EMIs but it reduces total interest paid substantially.

Say No to Unnecessary Add-Ons

Avoid bundled insurance policies or app subscriptions if not necessary.

Read the Fine Print

Understand terms, penalties and hidden charges before signing anything.

Personal loans are not bad at all they can be life-savers in emergencies or smart tools for planned purchases. But what separates a smart borrower from a struggling one is clarity and awareness. Always calculate the total cost also and not just the EMI. Read out every clause. Ask questions. Compare lenders and their offers. You need to understand the loan repayment psychology before opting for it and manage it effectively.

Recent article "How Personal Loan Offers Can Include Unwanted Add-Ons?"

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