Personal Loan Secrets Unveiled: 5 Things Banks Don’t Tell You (But You Need to Know)
When it comes to taking a personal loan online, many details can be easily overlooked amid the paperwork. Banks and other financial organizations generally share only the most basic information, but there are several lesser-known aspects that might affect the loan process and even a borrower’s chances of approval. This article covers five important features of a personal loan that banks typically don’t disclose—information that could greatly enhance your decision-making.
1. FOIR (Fixed Obligation to Income Ratio)
FOIR, or Fixed Obligation to Income Ratio, is a key criterion in determining personal loan eligibility, though it’s not always widely discussed. Banks use FOIR to calculate how much of a borrower’s income is committed to existing obligations, such as EMIs, rent, or other loans. In most cases, banks recommend a FOIR between 30-50% for salaried individuals and around 60% for self-employed individuals.
For example, if your monthly income is ₹100,000 and your EMIs and rent total ₹30,000, your FOIR is 30%. Banks prefer that, after accounting for the new EMI, borrowers remain within a manageable financial threshold.
Key Takeaway: Keep your FOIR in check. If it’s too high, consider repaying some existing debts to improve your chances of loan approval.
2. Processing Fees – More Than Just a Fee
Processing fees are charged at the time of loan application. These fees vary from bank to bank, typically between 0.5% and 2.5% of the loan amount, which can amount to thousands of rupees on large loans.
It’s wise to compare the processing fees of various banks before choosing a lender. Be sure to ask about special offers or reduced fees, as these can help reduce your overall cost.
Key Takeaway: Never take a loan without first asking about processing fees. Consider them part of the total loan cost.
3. Prepayment and Foreclosure Charges – Freedom with a Cost
Prepaying your loan is a financially sound choice, as it saves you interest charges. However, many banks impose prepayment or foreclosure penalties, usually between 2-5% of the outstanding loan balance, if you repay your loan early.
The catch: Banks rely on the interest from long-term EMIs, so early repayment isn’t in their financial interest. If you’re considering prepayment, weigh the potential interest savings against any prepayment charges.
4. Interest Rate Type – Fixed vs. Floating
Personal loans come with either a fixed or floating interest rate. Fixed interest rates remain constant throughout the loan tenure, providing stability, while floating rates can fluctuate. Some banks only briefly outline these options, so it’s crucial to ask about the pros and cons of each, based on your financial situation.
Key Takeaway: Choose an interest rate type based on your risk tolerance. Fixed rates are often ideal for steady incomes, while floating rates may suit those who can manage potential fluctuations.
5. Loan Tenure – Longer Isn’t Always Better
A longer tenure reduces your EMI, making repayments easier, but also increases your overall interest cost. Banks may emphasize the benefit of lower EMIs but rarely mention the higher interest you’ll pay in the long run.
For example, a ₹10 lakh loan at a 12% interest rate over 5 years results in an EMI of ₹22,224, with a total interest outflow of ₹3,34,667. Extending the loan to 7 years reduces the EMI to ₹17,653 but increases the interest cost to ₹4,82,830.
Key Takeaway: If possible, choose a shorter tenure. A higher EMI may mean more initial expense, but the long-term interest savings can make it worthwhile.
Conclusion
Understanding these factors is essential before apply for a personal loan online. Knowing these hidden details can help you make more informed choices. For expert guidance, consider using personal loan aggregator sites like Fincover.com, which display all relevant loan parameters, helping you make a well-rounded decision.