The illusion of personal loan: Why do you have to pay Rs 6.5 lakh for a loan of Rs 5 lakh? understand the full story

In case of sudden need of money, personal loan seems to be a great help. Just a few clicks and money in your account! But wait, have you ever thought that the 10% interest rate that loan companies advertise is actually costing you much more?

Most of the people take loan just by looking at the interest rate and later get trapped in the trap of EMI and hidden expenses. So, let us break this illusion today and understand how to find out the real and total cost of a personal loan.

Loan does not just mean interest, these 4 things also take money from your pocket.

When you take a loan, you not only have to pay the principal amount and interest. There are some other expenses associated with this which increase the total cost of the loan:

1. Interest Rate: You already know this. This is the price you pay for using the bank’s money. It can range from 9.98% to 17% or even more.
2. Processing Fee: This is the ‘service charge’ for preparing the loan file, verifying your documents and approving the loan. This can range from 0.5% to 4% of the loan amount. That is, on a loan of Rs 5 lakh Rs 20,000 till!
3. Prepayment Charges: Even if you get money from somewhere and want to repay the loan ahead of time, the bank can still charge you a penalty. This is called prepayment charge.
4. Late Payment Penalty: If your EMI is late by any month, the bank imposes a heavy penalty on that also.

Let us understand with an easy example

Suppose you have for 5 years 5 lakh rupees Took a personal loan, the interest rate on which is Rs. 10% Is.

• Your monthly EMI: It will be approximately Rs 10,624.
• Total payment in 5 years: 10,624 x 60 months = Rs 6,37,440,
• Interest only: 6,37,440 – 5,00,000 = Rs 1,37,440,

Now let’s add processing fees to this. Suppose the bank charged 2% processing fee.

• Processing Fee: 2% of 5,00,000 = Rs 10,000,

So the total and actual cost of the loan was:
₹1,37,440 (interest) + ₹10,000 (processing fee) = ₹1,47,440

This means that for Rs 5 lakh you got approximately one and a half lakh rupees Pay extra!

So how to avoid this trap? Use this magical tool

Be smart before taking a loan. Before jumping on any bank offer, go online EMI Calculator Use. This is a free and magical tool that will tell you in seconds:

• What will be your monthly installment (EMI)?
• How much total interest will you have to pay?
• How much money will go out of your pocket in 5 years?

Always compare offers from 2-3 banks and consider not just the interest rate but also the processing fees and other charges to see which loan is actually the cheapest for you. This small step can save you from big financial pressure in the future.