Before you borrow: a checklist for any loan

Borrowing is easy now: a few taps and the money lands. Checking the loan first is the part people skip. Five checks, done before you sign, catch most of the costly surprises.

1. The full yearly cost, not just the rate. The interest rate is only the price of the money. Add a processing fee, insurance bundled into the loan, and other charges, and the real cost climbs. That full yearly cost is the APR, or annual percentage rate. Compare loans by APR, never by the headline rate alone.

2. The Key Facts Statement. For retail loans, the lender must give you a Key Facts Statement, or KFS, before you sign. It’s a short, standard sheet with the loan amount, the APR, every fee, the EMI schedule and the recovery rules. Read it, and keep a copy.

Did you know? Under RBI’s April 2024 rules, the APR in your Key Facts Statement must include every charge the lender levies, plus charges it collects for others, like insurance. And a fee that isn’t in the KFS can’t be charged at any stage of the loan unless you explicitly agree to it. Credit card dues are outside these rules. Check the current RBI directions, since rules change.

3. The fees and the way out. Ask about the processing fee, the late-payment charge and the prepayment rule. For individual borrowers, floating rate loans carry no prepayment or foreclosure charge from 1 January 2026, under RBI rules. A fixed rate loan may still charge, so read the sanction letter.

A quick illustration. Two loans of 2 lakh rupees for 3 years both quote 14%. One charges a 1% processing fee, about 2,000 rupees; the other charges 3%, about 6,000 rupees, and adds bundled insurance. The second loan’s APR is clearly higher, though the rate is the same. The KFS shows you this side by side.

4. A regulated lender. Banks and NBFCs are regulated by the RBI, and the RBI website lists them. A loan app must name the regulated lender behind it. No name, no loan: an illegal loan app is the most expensive kind of borrowing there is.

5. An EMI you can carry. Add the new EMI to your existing ones and check what’s left for rent, food, savings and your emergency fund. If one bad month would make you miss a payment, the loan is too big or the tenure too short. A missed EMI hurts your credit score for years.

Before you ask, ask yourself. Is this good debt or bad debt? A loan that builds something lasting, like a home or a skill, is different from one that pays for a phone you could save up for. Our lesson on good vs bad debt walks through it.

The takeaway. Compare the APR, not the rate. Read and keep the KFS. Know the fees and the way out. Borrow only from a regulated lender. And make sure the EMI still fits in a bad month.

More to read: how an EMI works, personal loan vs credit card, and check your credit report.