What should I watch out for in the personal loan agreement?

Before you sign a personal loan agreement it is essential to read every detail carefully and understand the implications of each clause. A personal loan agreement is a legal binding document that details the conditions for borrowing and repaying the loan. Overlooking important details may lead to unexpected costs or repayment difficulties later.

Pay close attention to the type of interest rate—whether it is fixed or variable—as this will determine if your monthly repayments remain the same or can change over time.

Review the annual percentage rate (APR) that includes both the interest rate and any additional fees, to understand the true cost of borrowing. Processing fees, prepayment penalties as well as late payment charges are common additional costs that can increase the total amount you repay. Some banks and NBFCs may also levy charges for part-prepayment or foreclosure if you wish to settle your loan early, so it is important to check these terms in advance.

Examine the repayment schedule thoroughly. Ensure the EMI amount, due dates and total number of instalments are clearly mentioned. This will help you plan your finances wisely and avoid missing payments which could attract penalties or negatively impact your credit score. Watch for any hidden charges, such as documentation fees, GST or stamp duty.

Be wary of clauses that seem complex or unclear, such as those related to dispute resolution or mandatory arbitration. If any section of the agreement is confusing, do not delay to ask the lender for clarification.