There are several aspects of personal loans which most of the common customers are not completely aware of. Thus the rate of interest that is advertised by the financier may not actually be what the customer ends of paying. Several clauses which seem normal may eventually add up to the total money repaid for the personal loan. There is a need to understand and analyze all such features while availing a personal in order to make the best use of the facility without having to pay extra amounts.
There is interplay of interest rate and the base of calculation which ultimately determines the actual amount needs to be repaid. At times the financiers charge a declared interest rate on a completely different base amount than what is actually given to the customer thereby making the customer pay more than is actually due. Any loan has to be repaid through a specified number of installments which are agreed upon at the time of the loan approval. But the dilemma lies in the fact that many times the customer is asked to pay some installments upfront while availing the loan.
Implications of Upfront Installments
There are two distinct implications of the upfront installments that the customer is made to pay at the time of the loan disbursement.
- Some customers accept these upfront installments as some kind of down payment for the loan and have no objection to the idea. They view this extra money needed to be deposited as a proof of their financial standing and responsibility as the borrower. As long as their financial needs are met there are no objections from such customers.
- A second category of customers challenge the logic behind the upfront payment. If a customer is taking a personal loan of Rs. 100000 for which the EMI is fixed at Rs. 5100 for 24 months, he may be asked to deposit 2 upfront installments which amounts to a little more than Rs. 10000. Thus in actual terms the customer is getting only Rs. 90000. But the interest is calculated on the base amount of Rs. 100000. Thereby the customer is deprived of the benefits of the entire amount for which he is paying interest in the personal loan.
Thus in such cases the customer is paying interest for money he never borrowed which is against the basic principles of loans. The interest calculated on the additional amount or base implies that the actual interest paid by the customer is more than the interest as stated in terms and conditions governing the personal loan.
Illustration
If an individual takes a personal loan of Rs. 1 lakh for a period of 1 year at an interest rate of 16% p.a. and the EMI would come to Rs. 9,073. However when he has to pay 2 upfront EMIs he would pay a sum Rs. 18,146 in advance. This implies that he would receive an actual loan of Rs. 81,854 for which he will have to pay 10 EMIs each of Rs. 9,073. Calculating the actual interest that the customer has had to pay in this case works out to 23% which is much higher than the stated 16%.
For people looking for a personal loan such features as upfront installments are gray areas which need to be clarified with the financier at the time of availing the loan in order to avoid paying for more than what one has borrowed.