In the era of clicking “I agree” on just about every terms-of-service agreement, it’s important to read your loan documents carefully. 

It's a frequent misconception that banks hide malicious words in loan agreements to play "gotcha" with business owners, but understanding a loan deal is as simple as being alert!

Consequences of not reading the terms and conditions

It is critical that you always read the terms and conditions so that you understand what you are agreeing to. Businesses frequently hide phrases in these contracts, and if you never read them, you may find yourself in big trouble later on.

  1. Higher interest rates and Higher EMI 

The lenders trick the borrowers by hidden clauses. For example - if there are changes in the government policies or interest rates, there are high chances that the interest rates will also increase with them.

  1. Prepayment penalties 

Many lenders apply penalties to their borrowers if they repay the loan before the end of term. This may be because they would lose a chance to earn money. You should know that Prepayment Penalties are not payable, as per recent RBI guidelines.

  1. Loan closure and renewal 

When you have finished paying all your EMI’s, ensure that you get the No Objection Certificate from the lender and all the original documents.

Ensure that all the lien/hypothecation has been removed against your asset and credit report is updated accordingly.

  1. Transfer liability 

Most personal loans cannot be transferred to someone else. There are exceptions to this, such as car loans and home loans. So in case you no longer wish to repay your home loan, you can sell your home and use the proceeds to repay the loan after transfer of ownership title.

  1. Value of collateral and haircut 

Lenders often loan less than the value of collateral, so if you want to buy a house worth Rs. 10 lakhs, you will only get a loan of Rs. 8 lakh. The remaining amount will have to be paid by you.

And in case you fail to pay the loan in time, there are high chances that the lender will earn a lot more than the loan he gave out. So he can sell the house for Rs. 10 lakhs and accept a loss of your unpaid loan, thereby making a minimum profit of Rs. 2 lakhs.

TACTICS used by lenders 

  1. Unnecessary documents like P&L and balance sheet are made to be disclosed by the lender so that he can take a look at the borrowers finances and use it against the borrower 

  1. Indirectly availing Interest subsidiary: 

PMAY (Pradhan Mantri Aavas Yojana) grants interest subsidies on housing loans through the Credit Linked Subsidy Scheme to economically challenged sections of the society.

  1. Forcing to appoint a Co-Guarantor:

Lenders may trick borrowers into appointing a co-guarantor inorder to safeguard their interests in case the principal borrower defaults.

How you can safeguard yourself 

  • Make certain that your Terms and Conditions and Privacy Policy are written clearly and in a suitable font size and colour and simple language 

  • Ensure that you may access the Terms even after they have agreed to them.

  • Make sure you are notified of any significant changes to your Terms and Conditions or Privacy Policy.

  • Don't be hasty while applying for a loan 

While it may be tempting to skip over the terms and conditions in order to expedite the process, you should make an effort to read them every time you need to. This way, you won't have to cope with the consequences of restrictive conditions that you were unaware of when you signed an agreement. Your privacy is also very essential, and if you skim the terms, you may discover that your information is being shared without your awareness.