3 important things to check in your personal loan agreement before signing
In a personal loan, many borrowers focus on the amount borrowed, the interest rate, EMI, etc. However, there are other important terms and conditions related to the personal loan that a borrower must be aware of. All these terms and conditions are mentioned in the personal loan agreement. In this article, we will understand some of the terms and conditions mentioned in the personal loan agreement that the borrower must check before signing it.
Before we discuss what a borrower must check in a personal loan agreement, let us first understand what it is.
What is a personal loan agreement?
A personal loan agreement is a legal document signed between a borrower and a bank that outlines the terms and conditions under which the loan is given. It includes important things like the loan amount, interest rate, tenure, EMI, various fees and charges, etc. It also includes the bank’s and the borrower’s rights and responsibilities.
The agreement is legally binding on the borrower and the bank. As the agreement states everything in writing, it removes any possible ambiguity. Going through the agreement thoroughly before signing helps avoid any misunderstandings later. A well-drafted legal agreement leaves no scope for disputes later.
What to check in a personal loan agreement?
Some of the important terms and conditions a borrower must check in a personal loan agreement include the following.
Loan amount, interest and tenure: The loan agreement mentions the personal loan amount, the interest rate charged by the bank, and the tenure for which the loan has been taken. Based on the amount, interest rate, and tenure, the EMI is calculated. The loan agreement mentions the EMI schedule, which the borrower can use to track the loan repayment.
The loan agreement will mention the EMI date, i.e., the date on which the borrower’s bank account will be debited with the EMI amount every month. As per the repayment schedule, the agreement will mention the last EMI date, i.e., the date on which the loan ends.
Processing fees: Banks and NBFCs charge a processing fee to cover the administrative expenses related to the processing of the personal loan. The processing fee may be deducted from the loan amount. In such a case, the borrower will receive the net amount as the sanctioned amount minus the processing fee.
The processing fee is usually a specified percentage of the personal loan amount or an absolute amount. For example, the IDFC FIRST Bank website mentions the FIRSTmoney Smart Personal Loan processing fee as 2% of the loan amount. The Kotak Bank website mentions the personal loan processing fee as up to 5% of the loan amount. It also mentions that the processing fee will be deducted from the loan amount at the time of disbursal.
The processing fee is usually non-refundable. It means that the processing fee will still be charged even if the personal loan application is not approved. The personal loan agreement mentions the processing fee chargeable for the loan. The borrower must check the processing fee mentioned in the agreement and compare it with the actual amount charged.
Partial prepayment and foreclosure fees: Whenever the borrower has a surplus amount, they can use it to make a partial prepayment. Similarly, if the borrower has a sufficient surplus amount to repay the entire outstanding amount, they can use it to foreclose the loan. Banks typically charge a fee for partial prepayment and foreclosure of personal loans. The fee for these and the terms related to these are mentioned in the personal loan agreement.
The partial prepayment fee is usually a percentage of the amount paid or a flat amount. For example, suppose a borrower’s outstanding personal loan amount is Rs. 2,00,000, and the bank charges a 2% partial prepayment fee on the amount paid. If the borrower makes a partial prepayment of Rs. 25,000, they will be charged Rs. 500 + taxes (2% of Rs. 20,000) as a partial prepayment fee.
The loan agreement mentions the partial prepayment fee, when it can be made, how many times in a year, etc. For example, the Kotak Bank website mentions that the part prepayment fee is allowed up to 20% of the outstanding loan amount. It can be done post-completion of 12 months and is allowed once a year. The part prepayment fee is Rs. 500 + taxes for each instance.
So, the borrower must check the personal loan agreement for partial prepayment details, like when it can be done, how much, how many times in a year, and the fee for it.
The foreclosure fee is usually a percentage of the outstanding loan amount or a flat amount. For example, the Kotak Bank website mentions the foreclosure fee as 4% + taxes on the outstanding principal, up to 3 years. After 3 years, the foreclosure fee is 2% + taxes on the outstanding principal.
Importance of a personal loan agreement
A personal loan agreement is binding on both the parties involved, i.e. bank and the borrower. It establishes a legal relationship between the borrower and the lender. It mentions the rights of the bank as well as the borrower.
The personal loan agreement mentions all the terms and conditions, leaving no scope for disputes. However, if a dispute still arises, the loan agreement mentions the jurisdiction and dispute resolution details.
Enjoy the personal loan with responsibility
A personal loan can help you meet emergencies like a medical emergency, urgent home repairs, or renovation etc. On the other hand, a personal loan can help you enjoy moments with your loved ones, like celebrating a festival, a family occasion, or a much-needed family vacation etc. Whatever your reason for taking a personal loan, you must be aware of all the terms and conditions related to it. All these terms and conditions are mentioned in the personal loan agreement. Hence, make sure you read the agreement thoroughly before signing it. It will help you take a personal loan and repay it with the much-needed peace of mind.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.
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