It is almost impossible to spot sharks until too late to turn back, they say. The same is the case with some types of loans. It is no secret that debt is an evil necessity in today’s world. People are warming up to the idea of ‘borrowing’ from traditional banks and alternative lenders. New age Fintech companies have been coming up with quicker and more lucrative personal loan products time and again.
“Instant loans appeal to people immensely as the customers can evade the hassle of saving up for various purposes. It is more practical to take a loan and pay in easy installments over a long time period. So enamored people are by the quick and simple processing and disbursal that they often overlook these traps until it’s too late,” says Aditya Kumar, Founder & CEO, Qbera.com.
Listed below are the 5 most dangerous personal loan traps and how to avoid them:
Prepayment Charges: You got the loan and opted for a 24-month tenure. Six months later, you received an unexpected bonanza in the form of pay hike and you are in a position to close the loan once and for all (and save on interest). To your shock, you find that the pre-payment rules and charges are too much. You feel forced to drag the loan repayment. Therefore, opt for a lender which offers a free pre-closure facility.
Origination/Processing Fee: Almost every unsecured loan comes with a processing fee and there is no escaping it. But you can still get a better deal if you remember to compare the APR (annual percentage rate) of a personal loan rather than the interest rate alone. Some lenders simply deduct this fee from the approved loan amount, which many customers do not anticipate. This is one way how lenders ensure that you don’t close the loan early and this is actually prepayment fine in disguise.
Read the fine print and don’t make hasty decisions: Customers groan when they hear the age-old advice to ‘read the fine print’. It is tedious, long and boring studded with heavy financial jargons. But that’s where they ‘hide’ dangerous terms and conditions, which is right in the open and hence easy to miss. “Don’t get carried away by attractive taglines on the lines of ‘at lowest rate ever’ and suchlike. Agents and salespersons might push you to make a quick decision by saying things like ‘the offer will expire today’. But we urge you not to be impulsive; assess your needs and mull over the loan features before deciding,” says Kumar.
Don’t rely on your bank alone: You’re a customer of one bank for the last ten years and when you need an emergency loan, your first choice is naturally your own bank. You think you might be able to snag a better deal because of your association with them. But this is not always true. “They will never even give you the cheap options they offer to non-customers because it is relatively easy for them to persuade you to take whatever they are offering you. Do your research. There are quite a few reliable financial product comparison third party websites giving accurate and latest information regarding personal loans. Shortlist at least 5 and contact ring them up. You might be in for a pleasant surprise,” suggests Kumar.
Do you need your personal loan to be insured?: When you are offered an insured personal loan, beware. Some personal loans offer insurance (the most common ones being life insurance and cover in case of a job loss) ‘at throwaway price’ attached to it and this is often futile as costs associated with it often turn out to be a shocker. Protection against unemployment could be a tad more convincing as it can take care of your EMIs in the worst case scenario. It is better if you give this a miss (and save bucks) if you don’t have huge risk of layoffs in the next six months.