It is always better to be prepared and do homework before entering a financial transaction or making a strong move towards a purchase. Before borrowing it is always advantageous to know more about the cost of borrowing. The concept of loan is very much straight forward. The borrowed amount has to be repaid within a fixed period of time. But the borrower has to understand that repayment amount is more than the amount borrowed. This is because of the fees and interest charges that the Bank/ NBFC charge you to use its money.
Interest rate is one of the most important parts of the loan contract. To evaluate an interest rate, an effective interest rate and the nominal interest rate has to be understood. The nominal interest rate is the amount paid by the borrower on a monthly and annually basis. It is the percentage of the principal amount. Whereas an effective rate includes the other additional cost like loan processing, the insurance cost etc. Nominal monthly interest, repayment mode, fees & commission are few of the many factors that influence the effective rates. Besides interest some additional charges or fee is an extra privilege for the lender. Generally, a percentage of amounts are deducted at the time of disbursement in the name of such fee or charges.
During the personal discussion with the loan officer the borrower is free to ask him to make a detailed calculation based on the present terms and conditions offered by the Bank/ NBFC. As per the contract the lender might ask the borrower to pay an extra cost for the loan repayment before the maturity date. But this amount can be compensated in terms of the interest income the bank will be losing. This information has to be provided at the time of loan application processing. Other charges that the borrower should be aware of include late charges, delay payment charges and the loan processing fee. Though these charges are not assessed by all the Banks/ NBFC’s. To understand the fees and charges the borrower should read the agreement carefully. The loan agreement is the promissory note or a contract between the lender and the borrower that states that the lender will give the money and the borrower has to repay in it within a time frame with an agreed amount of interest. (Know more about Personal Discussion)
Hidden Cost Associated with Business Loans
While availing a Business Loan, a borrower should check the hidden cost twice before borrowing. Cost associated with Business loans is generally of three types: time, legal and disbursements. Due diligent Cost can be as easy as getting a credit report, finding an appraisal on the asset, audit of financial position or a detailed review of the business that needs more of money for its expansion. Before agreeing to any terms and conditions of the lender, borrower has to understand that who will be bearing these costs. Often a monitoring and administrative fee is also included in the EMI’s of every month. This needs to be checked before signing the contract. The loan term also plays an important role for the estimation of the additional costs associated. If the foreclosure charges are heavy, this might lead the borrower to keep the loan for the longer tenure and can result in higher costing in the end. Frequent need of money as a top up can also leads to transaction cost to be paid to the lender. (Know more about Business Loan)
Costs Associated with Home Loans
Buying a home is not only an emotional decision but needs financial considerations too. It’s a basic necessity, a matter of pride and works as a security. Home loan is best buying option and involves lots and lots of aspects to be considered. Identification of the right bank, interest rates, different fees, documentation, procedures and much more. Additional costs of Home Loans are as follows:
This fee generally depends on the profile of the borrower, income and the type of loan. This fee is incurred for the processing of the loan.
Banks/ NBFC charge this fee for the inspection of the legal documents like sale agreements along with the title search of the property by the empanelled lawyer appointed by the Banks/NBFC. Sometimes this cost is included in the processing fee of the loan.
Technical Valuation Charges
The banks/ NBFC carefully inspect the property for which the loan has been applied. A 3rd party person from the Bank’s side will visit the site to evaluate the fair price of the property. Age of building, quality of construction etc are the criteria to evaluate and these charges are upfront payments, before sanctioning the loan.
At times, either the documentation fee is charged under the processing fee or charged separately. This fee is charged for the maintenance of the documents like loan agreement, ECS etc.
Franking is the process of paying for the stamp duty for the sale of agreement or the purchase of loan. An authorized bank can stamp the document for the confirmation of the stamp duty payment. Franking charges vary as per the state laws and depends on the loan amount.
Cheque / ECS Dishonour Charges
If at any point of time the EMI is dishonoured, the lender will charge the borrower for the same. This amount depends on the instalments or the percentage of the recovery charges. This not only adds an extra expense but also reflects as a negative mark on the credit score.
When the borrower prepays the loan, the lender loses an opportunity to earn from the interest payment. Hence, to recover the cost indirectly, they might charge you with a penalty. Though, RBI has terminated this practice on floating interest rates loans. Fixed rate loans or loan availed under special schemes or if the payment is sourced through 3rd party. The type of loan and the charges vary from the lender to lender.
Document Retrieval Charges
Document Retrieval charges are implemented at the time when borrower demands the copy of the documents provided during loan process or a copy of any other documents related to same loan. Also this cost is incurred while transferring the original documents from the central location to the borrower. In case of special demand by the borrower. The central repository keeps your original property papers in safe custody. If the loan is borrowed in Bhopal and the Central Repository of the Bank / NBFC is in Mumbai so at the time of closure of the loan the papers will be transferred by the Bank / NBFC to Bhopal. This cost of transferring of the document is being charged from the borrower.
Charges of Statement of Account
Statement once in a year is free (Number of free statements Depends on Banks/NBFC), but in case of another generation of the loan statement, the bank might charge you for the same.
Balance Transfer / Resale Home Loan
Balance transfer of the Home Loan can cost you an extra charge as transfer fee (in case of Fixed Rate of Interest or loan being in the name of non individuals). Changing from one bank to another, one scheme to another scheme or even from a fixed rate of interest to floating rate of interest or vice – versa, you will be charged with this fee.
Surely, there are lot of charges linked to the Home Loans but still it is the best way to build an asset using a liability and convert a dream into reality. (Know more about Home Loan Balance Transfer)
Costs Associated with Mortgage
Over the course journey of home ownership, the Banks/ NBFC hand over a long list of expenses during a mortgage process. The total amount fee can be a surprise to the borrower. But to avoid such surprises one should read the agreement between the lender and the borrower carefully. The mortgage carries a varied option and closing amount. The cost of 30 years fixed or a 15 year fixed may not be the same as 5 or 10yr adjustable rate.
The mortgage closing cost goes to the 3rd party for the services they provide to complete the transaction process. Banks/ NBFC generally don’t have any control over such fees. The possible closing costs involved in the loan transaction are mentioned below:
Appraisal / Property Value
Property value is necessarily required to determine the fair value of the property. This valuation is done by the lender before the loan approval to ensure that the loan amount is not more than the property value. Along with the value of the property other important details also provided in the appraisal report for which a fee is charged.
During the loan processing the Bank/ NBFC check for the repayment capability for which they need a credit report. Credit report is required to review the borrowing history and the intention to repay the loan. This fee goes to the Credit Reporting Agencies. (Know more about its importance & Factors that negatively impact credit score)
Title Search / Legal Report
This fee is charged by the empanelled lawyer for doing a detailed search of the property records of your property. The study of prior deeds, property and name indexes, court records and many other documents are verified by the title company (empanelled lawyer). This is done to ensure that there are no obligations or problems associated with the property and the property is clear and marketable.
Insurance is done to cover the possible damages occurred in any awful event or any other damage. This insurance helps to cover the rebuilding cost
Walk confidently to prepay your loan along with the closing cost. Just be careful, plan, budget and review the options to reduce the closing costs. While receiving the loan estimate, take time and review each fee carefully. Few fee options might be negotiable and also request the lender to cover some cost. Borrower can also ask to match the closing costs offered in the market with other Banks/ NBFC. Always get your loan insured and if you are worried from where to start, then seek guidance from the experienced financial planning team of Mudra Home.