True cost of Personal Loans

A friend of mine took a personal loan from Citibank of value INR 1.1MM (11 Lakhs) but decided 12 hours later that he does not need it. To his surprise, he discovered that the cost of cancelling the loan was 80k. Here is how:

1. 1% processing Fee: 11,000/-

2. Payments for 6 months @30,614 p.m. = 1,83,683/- (4 years tenure)

3. 2% Pre-payment penalty: 19.912/-

4. Principal Left after 6 months 9,95,602/-

Total Payments: 12,10,197/- or a loss of 1,10,197/-

Of this he is able to recoup 30,373/- by reinvesting in a 6% FD of the same bank. This reduces the total loss to 79,824/- (or 7.26% of the borrowed sum)

I have always advised people to either borrow from friends/relatives or take a bank overdraft. Because there 15% interest means 15% and you will never have situations where you end up paying 7-8% for a couple of hours. Remember banks are predators who pose as friends.