When you apply for any Car Loan, you just focus on the Interest Rate as a major factor. But, you should not just focus on the rate of interest. Here, we will tell you how the loan lenders manipulate with different rates and make you pay more even then, when you just think that you are paying lesser amount.
How Loan Lender’s manipulations make your Loss even with a lower Rate of Interest
Majorly 2 Factors are hidden which make you pay more for a lower rate of interest as well. These are
- Loan Processing Fees
- Prepayment Penalty
Prepayment penalty is not for everyone, so we will not talk much about it. In short, this amount is charged when you pay your Loan before the loan period. For eg, you took loan for 3 years and you pay it back in 2 years, then also you have to pay penalty for that. This is something, which no body tells you if you do not ask.
Let us consider you will not prepay your loan and your Loan Prepayment penalty will be Zero. Let us understand, how Loan Processing Fees comes into picture.
Processing Fees Makes your interest Rate Shoot up
Let’s consider the following two scenarios.
- Principal amount of 2000000 $ at 12% p.a. to be paid back after 3 years with a processing fee of 2%.
- Principal amount of 2000000 $ at 14% p.a. to be paid back after 3 years with 0 processing fee.
Now just think when Loan agent comes to you and tells you 2 different plans. You will ask you the Rate of interest and he will tell you the interest rate without the processing fees because no body asked about it.
You opt for the loan of 12 % Rate of interest but forget that some hidden charges are there.
The additional 2 % fees makes your loan percentage to 13.63 % on the overview level.
| Amount | 200,000 | 200,000 |
| Tenure | 36 | 36 |
| Interest Rate | 12% | 14% |
| EMI | 6,642 | 6,836 |
| Processing Fee (%) | 2% | 0 |
| Processing Fee + Service Tax (Rs) | 4600 | 0 |
| Net Loan | 195,400 | 200,000 |
Conclusion
Now just think, there is another option for you. That offers 13 % without processing fees. You will just simply ignore it based on the rate of interest and the loan lender’s manipulation make you go in loss.
So next time if you ask for a loan, please ask about Processing fees as well. Also, please ask if there is some extra percentage hidden in the calculations. You can use our available loan calculators and compare the different loans.
We will be sharing another article with the details of Prepayment penalty soon.