Personal loans are a convenient way to meet urgent financial needs, but the fine print in loan agreements can sometimes lead to unexpected costs or restrictions. Being unaware of hidden clauses may increase repayment burden or affect your credit score.
Here are 5 hidden clauses in personal loan agreements that borrowers must carefully check before signing.
1. Prepayment and Foreclosure Charges
Many banks and NBFCs charge fees for prepaying or closing the loan early.
While some loans allow full or partial prepayment, the foreclosure charges can reduce the benefits of early repayment.
Tip: Always clarify prepayment terms and compare charges across lenders.
2. Processing Fees and Hidden Charges
Apart from interest, lenders often charge processing fees, administrative charges, or documentation fees.
Some agreements include annual or monthly service fees that may not be highlighted upfront.
Tip: Request a breakdown of all fees to calculate the true cost of the loan.
3. Default Interest Clause
Missing a payment may trigger a higher default interest rate, often significantly higher than the standard rate.
This clause can increase the loan burden quickly if payments are delayed even for a short period.
Tip: Understand the default interest rate and grace period before signing.
4. Mandatory Insurance or Add-Ons
Some lenders mandate personal loan insurance or other add-on products, which increase the effective loan cost.
Often, insurance premiums are added to the loan amount, raising EMIs.
Tip: Ask if the insurance is optional and evaluate if it’s necessary.
5. Legal and Jurisdiction Clauses
Loan agreements specify legal jurisdiction in case of disputes.
Some agreements favor the lender by allowing only specific courts or arbitration for dispute resolution.
Tip: Review this clause to know your rights and the process in case of legal issues.
Borrower Takeaways
Read the Fine Print: Don’t rely on verbal promises; verify everything in the written agreement.
Ask Questions: Clarify all charges, EMIs, and prepayment terms before signing.
Compare Lenders: Hidden fees and clauses vary across banks and NBFCs; choose the most transparent option.
Maintain EMI Discipline: Avoid default interest by setting up auto-debits or reminders.
Seek Legal Advice: For high-value loans, consulting a financial advisor or lawyer can prevent costly surprises.
FAQs
Q1: What is a hidden clause in a personal loan?
A: Any term or condition not clearly communicated upfront, such as foreclosure charges, hidden fees, or mandatory insurance.
Q2: Can I negotiate hidden fees?
A: Yes, some lenders allow negotiation on processing fees or add-ons, especially for salaried or high-credit-score borrowers.
Q3: How do I avoid default interest?
A: Make timely payments, set up auto-debit, and know the lender’s grace period policy.
Q4: Is loan insurance mandatory?
A: Not always. Some banks may make it optional; check before agreeing.
Q5: Should I consult a lawyer before signing a personal loan?
A: For high-value loans or unclear clauses, it’s a good idea to seek professional advice.
Published on : 3rd October
Published by : SMITA
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