When opting for any loan, make sure you read the terms and conditions carefully, and understand the 'other charges' to avoid any disappointment at a later stage, says Adhil Shetty.
When opting for any loan, the first thing most borrowers look at is the rate of interest. There is no denying the fact that the interest component of any loan is paramount in the scheme of things, but sometimes the devil is in the details, as the famous cliche goes.
Depending on the loan you are seeking, you may find many charges bracketed as 'other' charges. Many borrowers overlook the details and fail to factor in such other charges that can add up to make a substantial amount in the long run.
Here is a look at the common charges that may come bracketed as 'other' charges, which you must be aware of before signing on your loan agreement.
1. Processing fee charges
Every time you apply for a loan with a bank or non-banking financial institution, you are charged a percentage of your loan amount as processing fee. The amount varies from bank to bank based on your loan type.
For example, for home loans, the amount may vary from 0.5 per cent to 1 per cent of your loan amount.
Processing fee is charged upfront irrespective of whether your loan is sanctioned or not in the end. The money charged by the bank is used towards processing the details of your loan application and is non-refundable even if the loan is denied at a later stage.
This will be the case even if your loan is sanctioned but not availed by you within a given time frame.
2. Legal fee charges
Legal fees are charged by banks or NBFCs to ascertain the legal status of any property.
Usually, legal fees are applicable for home loans or loan against property. Banks entrust their legal cell department with checking the credibility of the property to make sure it is free of any legal obligations and comes with a clear title.
You can, however, save on the legal fee when buying a new property by opting for a property or real estate project that has been approved by the concerned bank.
In such a scenario, you are not charged any additional money towards legal fee as the project has been approved by the bank after due diligence.
3. Prepayment charges
Depending on your loan type, you may be charged an amount for prepayment of your loan. Prepayment penalty is usually applicable on personal loans, car loans, and also on home loans taken at a fixed rate of interest.
Before you opt for any loan, check the details of the terms and conditions for the loan to check for any prepayment clause and relevant charges. Prepayment may sound like a good idea but may not always beneficial.
For example, prepaying a home loan can mean no more tax deductions for the loan. If you prepay a loan much later in the term, the benefits may not be all that high.
Check whether you can earn a higher amount by investing the extra sum of money you have shortlisted for prepayment. If yes, then postponing the prepayment of your loan could a better financial decision.
4. Late fee charges
If you do not repay your loan EMIs on time, you will be charged a late payment fee. The late payment fee will depend on your lending bank or NBFC and the type of loan.
Usually, banks charge anywhere between Rs 250 to Rs 500 plus an additional interest as penalty for late payment.
5. Loan conversion fee
You may have the option of requesting your bank to convert your loan depending on your loan type.
Home loan borrowers, for example, can request a conversion from fixed to floating rate of interest, or vice versa. You can also request for a change in tenure of your loan.
Banks charge a nominal fee that normally is 1 per cent of the outstanding loan amount as loan conversion charges for such a request.
6. MODTD fee
Memorandum of Deposit of Title Deed (MODTD) is applicable on home loans where you deposit the title documents of your property with the bank. Since this memorandum is an undertaking, it is registered with the government and a stamp duty towards registration charges is applicable.
Usually, a charge of 0.1 per cent to 0.2 per cent of the loan amount is charged as MODTD charges.
7. Document retrieval fee
Once you successfully repay your loan, you are charged a nominal document retrieval charges where your documents mortgaged with the bank are transferred back to you from a central document repository.
Document retrieval charges are applicable only when you as a borrower deposit your property documents with the bank.
8. Admin charges
Banks and NBFCs sometimes charge an additional fee towards administrative charges. These charges cover the administrative costs of processing your loan application. Administrative charges are charged over and above the loan processing charges.
Illustration: Uttam Ghosh/Rediff.com
Adhil Shetty is CEO and co-founder, Bankbazaar.com