Personal Loans: What Should I Be Aware Of?

by Vinaya HS on February 4, 2017

in Finance

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Excitement was in the air. Rajesh had just secured a personal loan and was planning a trip to Europe with his wife. The mood in the office was infected by his exuberance as he was leaving in a week’s time. Days passed and he came back with beautiful photographs, mementos, memories…and a niggling doubt that something was not quite right with his personal loan.

“I think there is some issue with this loan I have taken; could you please take a look at the documents?” Rajesh said, slipping into the chair next to me. He handed over a slim folder with his loan documents. His euphoria of getting a large loan was slipping and he seemed puzzled with the fine print that he had neglected to go through earlier.

I noticed from a covering letter that his loan had been processed through a Direct Selling Agent for a large nationalised bank. This made me a little wary as DSA’s can go to any length to achieve their lending targets. Nearly 80% of the loans sold in our country are through this indirect channel of outsourced sales persons. Alarm bells ringing, I opened the actual loan document.

What went wrong?

“I paid Rs. 20,000/- to get the loan sanctioned urgently and the agent had confirmed that there are no processing fees. But now I see that only Rs. 3,82,800/- has been credited instead of the 5 lakhs I was to receive. I was in a hurry to finance my trip, so, I did not read the documents before leaving. Once the loan was sanctioned I was sure that the agreed amount would flow into the bank. But now I see many irregularities in the paperwork. It is quite different from what we had agreed.” He looked at me helplessly.

“Paid for getting the loan fast-tracked? There are no cash fees or payments for getting loans sanctioned. And why did you not check the amount when you received it?” I was shocked at the blatant cheating. Obviously, Rajesh had left the country without waiting for the sum to be credited as he would be using his credit cards. But, the damage was done. The burning question was by how much?

I started reading the loan documents. The fine print is what most of us neglect to read, preferring to depend on the verbal assurances of agents who are not even directly attached to the bank. As expected, the detailed pain points were many.

“The processing fees were so high, and I paid a commission also!” lamented a distraught Rajesh. “I should have figured all this out earlier.”

“If it is restricted to this much you are lucky. Did you apply to multiple banks by any chance? If yes, then your credit score or CIBIL credit will be impacted adversely. A good CIBIL score is necessary to avail further loans, good interest rates, and is an indicator of your credit worthiness. Do remember that personal loans are unsecured loans and the bank takes a sizeable risk in processing the loan”, I shared the information gleaned from my years as a financial advisor.

Check points for a loan application

By this time, Rajesh looked dazed. The interest rate was a little different from what was conveyed earlier. Also, The EMI was much larger than what he had anticipated. Given all this, it was natural to see him puzzled and on tenterhooks.

“That is normal; the banks inflate the first year’s EMI by adding more interest in the initial stages. Also, the rate of interest needs to be calculated on the EMI calculator to ascertain that you are not being cheated.”

Rajesh shook his head with frustration. “I should have asked you to read through the fine print with me. Luckily the tenure and prepayment norms are as he had promised. I will prepay this loan after a year after taking a new one of a lower amount.”

I noticed his hung shoulders as he got up and walked towards his cabin. All I could do was feel sorry for my colleague.

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